A SPJIMR Study and Proceedings of the Round TableA SPJIMR Study and Proceedings of the Round Table...

Showcasing Best Practices in Corporate Governance by

Medium Sized Family Managed Public Limited Companies- Three Case Studies

A SPJIMR Study and Proceedings of the Round Table Sponsored by

National Foundation for Corporate Governance Prepared by

Jiban K. Mukhopadhyay Professor / Coordinator, Corporate Governance Initiatives, SPJIMR

&

Dolly Dhamodiwala Senior Researcher, SPJIMR

March 2010, Mumbai

Preface

National Foundation for Corporate Governance (NFCG) has been set up by the Ministry of Corporate Affairs, Government of India, in partnership with Confederation of Indian Industry (CII), Institute of Chartered Accountants of India and Institute of Company Secretary of India. NFCG’s goal is to promote better corporate governance practices in India in many ways. NFCG has accredited SPJIMR as a partner institute where research and training on corporate governance would be regularly conducted. SPJIMR submitted the following two research proposals to NFCG for the year 2007-08:

1. Pilot Research Study on Corporate Governance in Medium Sized Family Managed Public Limited Companies.

2. Showcasing Best Practices in Corporate Governance by Medium Sized Family Managed Public Limited Companies (Two/ Three Case Studies)

The proposal for the second study was accepted by NFCG. A grant of Rs. 3 lakh was sanctioned for conducting this study. Subsequently, NFCG also granted another Rs. 3 lakh for organizing a Round Table in 2008-09 to dissemininate and discuss the findings of the study. We are thankful to NFCG for their sponsorship, funding as well as encouragement. Both the studies have been initiated since October 2006. The second study, i.e. the present study, is in fact, embedded in the first study. The present report is the second study submitted to NFCG. The study has been based on both secondary research as well as primary survey. We have interviewed CMDs / CEOs / Company Secretaries of 30 Medium Sized Family Managed Public Limited Companies in Mumbai based on a structured Questionnaire. We are thankful to CMD/ CEOs/ Company Secretaries as well as other top executives of these companies for their cooperation in conducting the survey. Our approach on Showcasing Best Practices in Corporate Governance of the selected companies has largely been based on: Compliance (both mandatory and non-mandatory criteria) to SEBI Clause 49 of the Listing Agreement of the companies with the Stock Exchanges of India (made legislatively compulsive from January 2006) as well as a large number of selected criteria for practices Beyond Compliance. While all the 30 companies interviewed had to comply with mandatory compliance criteria of Clause 49, we have observed that about one-third of these companies had adopted very good corporate governance practices with respect to both mandatory and non-mandatory criteria under Clause 49, besides taking a number of initiatives extending Beyond Compliance. The study was prepared by Prof. Jiban K Mukhopadhyay, Professor / Coordinator, Corporate Governance Initiatives, SPJIMR and Ms. Dolly Dhamodiwala, Senior Researcher, SPJIMR. The study / report (about 200 pages) was eventually submitted to NFCG in September 2008. A half day Round Table was organized on April 27th, 2009 by S P Jain Institute of Management & Research which was supported by NFCG. The Round Table was organized to disseminate the salient findings of the study and discuss the various issues contained in the study in an open forum. The Round Table was attended by over 60 participants.

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The Round Table was spread over two sessions. The first session was the Inaugural Session, chaired by Mr. Gopal Chalam, Dean, ICSI – CCRT. Welcome address was delivered by Dr. Sesha Iyer, Director, SPJIMR. This was followed by an introduction on SPJIMR’s Family Managed Business Centre by Prof. Parimal Merchant. The keynote address was delivered by Mr. Vijay Kapur, Director, ICAI, which was followed by a power point presentation of the salient findings of the study by Prof. Jiban K Mukhopadhyay. The second session was the Presentation of the Three Case Studies. The case study of Godrej Consumer Products Ltd. was presented by Mr. Adi Godrej, Chairman, Godrej Group, that of Bajaj Electricals Ltd. by Mr. R Ramakrishnan, Executive Director and that of Hexaware Technologies Ltd. by Mr. Dipendra Chumble, Chief People Officer. We are profoundly thankful to all of them for extending their cooperation despite their extremely busy schedule. We are also thankful to all Core Group of Experts of NFCG, to Mr. Rajesh Menon, Fmr. Executive Director, Mr. Marut Sengupta, Executive Director, NFCG and Ms. Shalini Budathoki, Deputy Director, of CII. We have received valuable guidance and comments from Dr. M.L. Shrikant (D.B.A Harvard), Hon. Dean, SPJIMR and are very grateful to him. We are also thankful to Prof. S. D. Kshirsagar for his cooperation and guidance. Ms. Manjula Harikrishnan and Ms. Kirti Rao, both Research Assistants, have provided extremely useful support. Mr. Mukesh Gujaran has very competently handled the production job. Without their sincere efforts it would not have been possible to produce this document. March, 2010 Mumbai

Jiban K Mukhopadhyay Dolly Dhamodiwala

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Executive Summary

Part I

Showcasing Best Practices in Corporate Governance by

Medium Sized Family Managed Public Limited Companies – Three Case Studies

Background

SPJIMR, one of the top ten among 700 management institutes in India, has pioneered the Family

Managed Business program since 1997. The institute has developed an insight into the management

and performance of family managed businesses in India. National Foundation for Corporate Governance

(NFCG) accredited SPJIMR as an institute for carrying out research and training in corporate governance

(CG) in the year 2006-07. As part of its agenda for promoting excellence in Corporate Governance,

SPJIMR had taken up in 2007 the present Study , ‘ Showcasing Corporate Governance Best Practices by

Medium Sized Family Managed Listed Companies – Three Case Studies. ‘ The Study was completed and

submitted to NFCG in Sept. 2008.

Objectives The following objectives were identified for the present study:

1. To assess and evaluate Best Practices in Corporate Governance adopted by selected

medium-sized family managed companies

2. To prepare Three Case Studies to showcase Best Practices in Corporate Governance by

these companies

3. To discuss these Case Studies in the National/International Convention/Round Table in the

presence of the CEOs of the companies

4. To document and publish the Case Studies along with the proceedings of the Convention /

Round Table for creating general awareness

The Study is presented in two parts. Part I presents an evaluation of the Corporate Governance

practices adopted by selected medium sized family managed companies with respect to the regulatory

norms including SEBI Clause 49 of the Listing Agreement. Part II presents Case Studies of three

companies which had displayed superior corporate governance standards while complying with the

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regulatory norms and had gone even beyond compliance having taken several other initiatives towards

enhancement of value for all stakeholders.

Corporate Governance by Family Managed Business – A Global Perspective (Chapter 1)

The study began with a review of the concept and evolution of CG practices in the developed countries,

particularly UK and USA. This included a study of the events which brought into focus the need for

better governance standards and the recommendations of various committees like the Cadbury

Committee in UK, the Cal PERS – California Public Employees Retirement System, the OECD Task Force

and the Sarbanes Oxley Act in USA.

Recent global developments in CG and the issues and constraints faced by family managed companies

were also studied through a review of published literature and empirical studies carried out by

academicians and financial analysts.

Corporate Governance by Family Managed Business – Indian Approach (Chapter 2)

The prevailing Corporate Governance practices in India were studied by reviewing the developments in

CG in India and the evolution of the regulatory framework, which was largely based on the

recommendations of various high level committees, notably the Kumar Mangalam Birla Committee, N R

Narayanmurthy Committee and the J J Irani Committee. The present regulatory framework for CG in

India viz. the Companies Act 1956 (together with its 24 amendments), the new bill (2008) for its re-

legislation, SEBI Clause 49 - of the listing agreement of the companies specifying detailed regulatory

norms of CG, etc have also been discussed and commented upon.

This was followed by a quick review of the studies on best practices in CG as well as the imperatives for

CG practices in the globalizing India.

Some of India’s family managed companies demonstrated excellent CG practices even going far beyond

mere compliance, while there were many companies which complied with regulatory CG norms only in

letter.

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The present SPJIMR study is unique in the sense that it has assessed CG practices of the selected

companies not only relating to regulatory norms but has also gone further and assessed several other

practices, which are beyond compliance norms.

Methodological Framework for Selection of three Companies for Case Studies Showcasing Best Practices in CG- (Chapter 3)

Definitions

Family Managed Companies - For the purpose of our study, family managed companies have been

defined as those with promoters’ shareholding of 25% and above in the total shareholding of the

company.

Medium-sized Companies – Medium-sized companies have been defined as those with value of total

assets between Rs. 200 cr. and Rs. 2000 cr. in 2005-06.

In order to prepare three Case Studies to showcase best practices in CG within this group of companies,

we selected three companies, which demonstrated visibly superior standards of CG compared to their

counterparts. Under the prevailing regulatory regime where all listed companies had to mandatorily

comply with the prescribed norms of CG, a well defined framework had to be evolved for selection of

the right companies.

Selection of Three companies

The selection of the three companies was based on a detailed examination of all information relating to

corporate governance practices and other related accounting, auditing and legal procedures as

published in the Annual Reports and other data sources available in the public domain. This was

followed up by personal interviews with the Chairmen/MDs/Company Secretaries of a selected sample

of companies with the help of a detailed structured questionnaire.

Sampling Procedure

From the database of 1,166 companies listed on both BSE and NSE in 2005-06, 531 companies in the

Western Region were identified forming the sampling base. Application of the above two definitional

criteria to these 531 companies threw up 173 medium sized family managed companies in the Western

Region. From this total, companies promoted by leading Business Houses like, Tatas, Birlas and

Ambanis were excluded. This reduced the base to 162 companies in the Western Region. As up-to-date

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information on Corporate Governance practices and performance parameters was not available for some

of the companies, these were dropped from the sample. The final sample thus reduced to 150

companies. All information relating to Corporate Governance practices of these 150 companies was

analysed on the basis of the information published in their Annual Reports.

Primary Survey

This analysis was followed by a primary survey of 109 companies which had their corporate offices in

Mumbai. For conducting the survey, questionnaires were sent to all the 109 companies by mail. After

persistent follow-up with all the companies, in-depth discussions could be held with 30 companies which

gave a positive response to our survey – success rate of 28%. These 30 were fairly equally spread over

three asset classes – Rs. 200-500 cr., Rs. 500-1000 cr. and Rs. 1000-2000 cr.

Based on the information gathered through secondary data and personal discussions, CG practices of

the 30 family managed medium sized companies were assessed.

Two main Criteria for Assessment

The following two criteria were determined for assessing and evaluating corporate governance

practices.

(i) Compliance (both Mandatory and Non- mandatory) with the Regulatory norms for Corporate

Governance as covered under the SEBI Clause 49 on Corporate Governance. Compliance was

assessed on the basis of 13 major Mandatory parameters with over 21 sub – parameters.

Similarly eight Non-mandatory compliance parameters (e.g. remuneration committee, whistle

bowler policy, etc) were also assessed.

(ii) Practices Beyond Compliance for which 23 parameters with 24 sub-parameters under each were

determined. These related to company philosophy, values and obligations, goals and objectives,

contribution of independent directors, role of promoter/ CMD/ MD in decision making, board

level/ other committees, company evaluation and board evaluation processes, risk management,

human resource development, environment protection, innovation, CSR, etc. were taken into

consideration for the purpose of assessment.

Data / information relating to CG practices obtained through the questionnaires, annual reports other

published sources and websites of all the 30 surveyed companies were analyzed. Based on this analysis,

eight companies were short-listed for more in-depth analysis

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A quantitative framework was devised for assessing the corporate governance practices of these eight

selected companies. This involved scoring the parameters under each of the above two criteria viz.

Compliance and Beyond Compliance. Scores were assigned to each of these parameters on a Ten

Point Scale to bring out the differences in the governance practices of the companies.

The scores obtained by each company, under each criterion were aggregated and appropriate weights

assigned to the total value. A higher weight of 0.7 was assigned to the criteria of Compliance and a

lower weight of 0.3 to Beyond Compliance.

Based on the total weighted average score obtained by each company and its percentage share to

overall (aggregate) weighted average score, the eight companies were graded.

Box : Eight Companies Showcasing Best Practices in Corporate Governance

1. Godrej Consumer Products Ltd. 5. Bajaj Electricals Ltd.

2. Asian Paints Ltd. 6. Marico Industries Ltd.

3. Hexaware Technologies Ltd. 7. Unichem Laboratories Ltd.

4. Crompton Greaves Ltd. 8. Joyti Structures Ltd.

These eight companies were selected from 30 Family Managed Medium-Sized Companies from Mumbai

which were intensively surveyed based on a structured questionnaire together with a detailed analysis

of information and data available from the survey and their Annual Reports. Since the scope of the

research project approved by NFCG was limited to the preparation of three case studies, it was decided

to approach the top five companies ( companies which had obtained relatively higher scores) from the

list above, for the preparation of three case studies.

Three of these five companies gave a prompt and positive response for the preparation of the case

studies. These are Godrej Consumer Products Ltd., Bajaj Electricals Ltd. and Hexaware Technologies

Ltd.

Case Studies (modeled on certain globally reputed studies by Harvard Business School and those

published by OECD) were prepared for these three companies after holding in-depth discussions with

their Chairmen, Executive Directors and Company Secretaries. Discussions were followed up with a

detailed analysis of all other information relating to the operations of the companies and their financial

performance as obtained from published sources.

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Case studies as included in Part II of this report were prepared in close collaboration with the

authorities in the respective companies and approved by the respective Chairmen.

Findings of the Study (Chapter 4)

Our survey of 30 family managed companies has revealed that though the family owned companies are

progressing towards better governance practices and ensuring compliance with most of the provisions

of SEBI clause 49, there are as yet several areas of governance which need further strengthening.

(i) Compliance with SEBI Clause 49

All the surveyed companies had fully complied with all the mandatory provisions of the SEBI

Clause 49 relating to corporate governance, though compliance with non-mandatory

provisions, with the exception of the formation of the Remuneration committee, was observed

in case of only a few.

Again with respect to compliance, the measures adopted for adherence to various provisions

varied significantly across companies. Well governed companies had set up appropriate

systems, at times sophisticated IT related infrastructure and even appointed consultants and

specialists to derive maximum benefits out of them. The rest of them had declared compliance

in their corporate governance reports but the procedures adopted were not documented and

the responsibility was largely assigned to the respective committees or internal auditors.

(ii) Philosophy on corporate governance

Majority of the 30 surveyed companies i.e. 83% had emphasized good business ethics,

integrity, accountability, transparency and stakeholder value enhancement in their corporate

governance philosophy. The rest 17% had laid greater thrust on maximizing shareholder value

through higher growth in profits, product improvement, market leadership and increased

customer satisfaction.

(iii) Shareholding of Promoters

In nearly 60% of the surveyed companies, promoters held the majority shareholding of over

50%. The shareholding with the public was lower being less than 20% for majority of the

companies, while the shareholding of FIIs/NRIs/OCBs was comparatively higher, going up to

over 30% in some cases. This indicates the increasing interest of foreign investors in well

governed family managed companies.

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(iv) Constitution of the Board

All the surveyed companies had fulfilled the required norms for appointment of Independent

Directors. The average Board strength was 9.2 per company and the average number of

independent directors was 5.1 which at 55% of the total exceeded the minimum stipulated by

Clause 49. In nearly 43% of the companies the Chairman was non-executive. Irrespective of

whether the Chairman was Executive or Non-executive, the number of Independent Directors

exceeded the minimum stipulated in Clause 49. In the larger sized companies where the

Chairman was Executive, the number of independent directors was higher at 63% compared to

50% stipulated under the Clause.

(v) Promoters’ Influence on Boards

In majority of the companies (76%), the Chairman was either Executive Chairman or played

the dual role of Chairman and Managing Director.

With higher stakes in equity, there was a tendency for the promoters to exert greater influence

on the Board decisions. This was visible in nearly 40% of the surveyed companies particularly

the smaller sized promoter driven companies. Here, the Board played a more passive role and

the independent directors restricted their contributions essentially to issues relating to finance

and accounts, legal and compliance.

In contrast, in the remaining 60% of the companies, a consultative approach had been

adopted for all Board decisions. These were the companies where the Chairman or the CEO

encouraged active involvement of independent directors on all major issues – financial, legal

and even strategic, which indicates a positive shift towards better governance practices. A few

of these had appointed professional experts or independent directors as their CEO or Non-

Executive Chairman to lead the company. (See Graph I)

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Graph I - Influence of Promoters

(vi) Role and Functions of the Board

ad defined clearly the role and functions of the Board,

Graph II - Role & Functions of the Board

50%

10%

40%Collective Responsibility ofPromoter / CMD, supported byBoard

Managed by Professional Experts

Managed by CMD & supported byTop Mgmt.

Majority of the surveyed firms, 46% h

which were separate from managerial functions. The Board’s role was to set the goals and

targets, guide the management and supervise the direction in which the company was

headed. However, in one-third of the companies, essentially the smaller sized companies, the

Board apart from its supervisory role, was also actively involved in the management of the

company. (See Graph II)

0102030405060708090

100

1000-2000

500-1000 200-500 AllClasses

Asset Classes

Com

pani

es (%

) Promoter Managed

Managed Collectively byBoard & Sr MgmtClearly defined Roles ofBoard & Sr Mgmt

The remaining 21% of the companies were promoter managed companies, with the

Chairman and Executive Directors actively involved in the management.

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(vii)

oter driven companies, the major

Graph III - Contribution f Independent Directors

In the companies where the boards were more balanced the independent directors were also

involved in other functions like development of strategy and its execution, risk assessment,

lause 49, the independent directors are expected to perform multifarious activities as

embers of the Board and as members of various committees. Being on Boards and

Role of Independent Directors

In the family managed companies, especially the prom

contributions of the independent directors centered around maintaining transparency and

proper disclosures in financial statements, monitoring and oversight of financial and

accounting processes and ensuring their correctness, review of legal issues and compliance

with listing and other regulatory requirements aimed at enhancing shareholders’ value. (See

Graph III)

o (Based on Multiple Responses)

7.9%7.9%

8.3%

9.1%

7.9%

8.3%

50.6%

Protection of MinorityShareholders

Investors' Confidence

Review of Legal Compliance

Transperancy & Disclosures

Monitoring & Audit of Fin & A/c

Enhancement of Shareholder& Co. Value

Others(Dev.of Strategy,RiskAssessment, InternalControls,etc.)

supervision of internal controls, etc. This is an indication of the changing trends in the family

managed companies where the promoters are loosening their influence on their Boards and

are open to advice from outside experts keeping in view the long term benefits to company

value.

Under C

m

Committees of several companies, some of them have faced constraints of time and are

unable to attend to matters other than finance, accounting, legal and compliance with

regulatory requirements.

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Lack of adequate and timely information has also posed a major constraint. At times, their long

nure on the Boards, over 10-15 years, might have affected their role as watchdogs for the

(viii) ees

All the surveyed companies had set up the Audit Committee and the Shareholders’ Grievance

ot mandatory, 90% of them had also set up the Remuneration

(vii)

Training of Board members and evaluation of non-executive directors’ contributions, both non-

ajority of the companies.

is

heartening to know that at least 13 out of 30 companies, or 43% had gone beyond

s of evaluation were peer evaluation (15%), or informal evaluation by MD

(15%). Another 15% had assigned the task of evaluation to the Remuneration Committee.

ther

Directors) or by each director himself (self evaluation) based on some pre-determined criteria

te

company. Moreover, the dominance of promoters and at times family councils on the Boards,

especially in strategic and operational decisions, lack of proper demarcation of responsibilities

and the absence of a well communicated succession policy have posed major constraints to the

independent directors

Board Level Committ

Committee. Though it was n

Committee. The composition of the committees was in accordance with the stipulations of

Clause 49. The Audit committee constituted on an average 3.8 members with three being

Independent Directors. Though the Audit committee performed most of the financial and

supervisory functions, the functions relating to investigations of defaults and frauds and

performance monitoring of internal auditors was not carried out in most of the companies. The

Shareholders’ Grievances Committee constituted 2-3 directors usually independent directors

but the Chairman was by and large the promoter director or Chairman of the company.

Training and Evaluation of Board Members

mandatory provisions, were not undertaken by m

Though none of the surveyed companies had gone in for formal evaluation procedures, it

compliance and developed an informal structure for evaluating both the Executive and Non-

executive Directors. Some of them had even laid down the parameters for evaluating the

directors, which were later examined by the Remuneration committee These were based on

the contributions of the directors in the discussions and debates on key management

proposals, injection of fresh ideas, evaluation of new opportunities for the company, level of

interest shown in the operations of the company, attendance to Board and committee

meetings, etc.

The other mode

In the smaller sized firms evaluation was done more informally by the MD or by peers (o

for evaluation.

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(viii)

management framework was high on the agenda of majority of the surveyed

companies. The companies, particularly those operating in the global markets, had developed

constituted a separate Risk Management Dept.

e extra

Risk Management and Internal Controls

An effective risk

a formal Risk Management Model and had also

The others had identified the risks facing their companies and had at least framed a Risk

Management Policy for monitoring and mitigation. Formal risk management systems were

instituted by 23 or 77% of the companies. (See Graph IV). Over 25% of the responses

indicate that developing a Risk Management Model and setting up a Risk Management

Committee were the more commonly adopted practices for risk management among the

companies.

Graph IV - Risk Management

05

10152025

35

Risk Mgmt Policy Risk Mgmt Model Risk MgmtComm./Team

/Dept

Outsideconsultants

No separateframew ork butreview ed by

Board/AC

Modes of Risk Mgmt. (All Classes)

Res

pons

es (%

30)

The internal control framework in majority of the surveyed companies needed further

strengthening and this fact was recognized by most of them. Majority of the responses (42%)

indicate that the function of reviewing and monitoring of controls was assigned to independent

auditors. However over 30% of the responses show that some companies had mad

efforts for implementation of an ERP environment for this purpose. (See Graph V)

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Graph V - Internal Control Systems

(ix)

r for each group of

lated parties, declaring that they were in the normal course of business.

subsidiaries and associate companies and

mily holding companies which may not be listed.

ar informal

mechanism had been put in place for reporting of frauds and unethical practices.

for Stakeholders

05

101520253035404550

Appointment ofIndependentAuditors to

monitor & advise

ERP Environment- SAP

Implementation

PeriodicalReview s of each

Division'sResponsibilities

ComprehensiveComplianceReportingProcedure

Assistance ofoutside

professionalconsultants

Others

(All Classes)

Resp

onse

s (%

)

Transparency and Disclosures

Transparency in transactions results in increased accountability and this is another area of

concern in the family managed companies. Only around one-third of the surveyed companies

had gone beyond compliance and declared their material transactions in detail for each

individual party in their Annual Reports, along with their relationships with the parties. Majority

of the companies had presented their transactions in a combined manne

re

Global investors are looking for greater transparency in the balance sheets of family managed

companies, some of which have a large number of

fa

(x) Whistle Blower Policy

Family managed companies had begun to appreciate the benefits of this mechanism and one-

third of the companies surveyed confirmed that if not a formal policy, a simil

(xi) Value Creation

Majority of the surveyed companies had declared enhancement of company value and

shareholder value as the focus of their long term goals. While good financial performance

ensured shareholder value, specific initiatives had been taken by majority of the companies for

creating value for their customers, employees and society. These were reflected in their well

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conceived Human Resource policies aimed at retaining talent and upgrading their skills,

continuous product improvement, diversification and quality up-gradation for greater consumer

satisfaction, environment protection and welfare of the Society through various action-oriented

social service activities.

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Part II

Three Top rated Companies Showcasing Best Practices in CG

(Chapters 6 to 8) : Case Studies

All the eight companies as mentioned in Box 1, have stood out among the 30 surveyed companies for

compliance with Clause 49 as well as for practices beyond compliance. Relatively superior corporate

governance standards were reflected in their philosophy on Corporate Governance, focus of their goals

and objectives with emphasis on value creation for all stakeholders, greater independence of the board,

active involvement of independent directors in all issues concerning the company and various other

voluntarily adopted practices.

First five of these eight companies were approached seeking their association in preparation of case

studies. Of these three companies responded positively and extended full cooperation. These were

Godrej Consumer Products Ltd., Bajaj Electricals Ltd. and Hexaware Technologies Ltd. Thus,

Case studies were prepared for these three companies.

These are the companies which, apart from complying fully with Clause 49, had extended beyond

compliance by adopting more advanced systems and procedures like ERP, SAP for their core functions.

Initiatives taken by them for assessing Economic Value Added (EVA), obtaining Corporate Governance

rating from reputed agencies and acquiring national and international recognition for superior

governance practices are some of the achievements which have set them apart for best practices in

Corporate Governance.

These are also the companies, which had put up a good financial performance, creating value for their

shareholders and had also made commendable efforts for enhancing value for all other stakeholders

including employees, customers and society at large.

(i) Godrej Consumer Products Ltd.

In our Study, Godrej Consumer Products Ltd.(GCPL) has been ranked first among the 30 surveyed

companies.

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Historical Background

GCPL a leading FMCG company, is a major constituent of the 112 year old Godrej Group of companies.

The entire Godrej Group is committed to achieving and maintaining the highest standards of Corporate

Governance.

The founding fathers of the Group, Ardeshir and Pirojsha Godrej and later Pirojsha’s sons Sohrab, Naval

and Burjorji laid the foundation of two flagship companies, Godrej & Boyce Pvt. Ltd. and Godrej Soaps

on sound ethical lines with an emphasis on service to the consumer. Their philosophy on good

Corporate Governance was evident in their strong commitment to the manufacture of quality products,

sold at the best possible price backed by assured after-sales-service. Despite several hurdles that

industrialists faced during his period, Pirojsha Godrej firmly believed that the fundamental reasons for

the existence of an organization are to satisfy its customers, make profits and retain a motivated group

of employees. Conveying these ideals to his sons, he propagated the tenets of Value Creation for all

Stakeholders as is known today. He created a climate of openness and benevolence within the

organization by making himself and his management approachable to all his workers, providing them

with job security and other basic benefits like residential quarters, education for children, healthcare

and recreation facilities and a variety of other welfare activities which were well ahead of their time. His

commitments and beliefs have been carried forward by the following generations giving the Group its

brand value as a benevolent organization with a modern outlook and a zeal for innovation.

Godrej Soaps the parent company diversified from soaps and toiletries into a range of products like

edible oils, chemicals, animal feeds, etc. under the leadership of Burjorji Godrej, who was committed to

research and innovation. During the 1990s as the winds of liberalization started sweeping across all

Indian industries and competition mounted, Burjorji’s son Adi Godrej, the present Chairman of the

Godrej Group and Executive Chairman of GCPL decided to turn Godrej Soaps into a public limited

company in 1993. This enabled the company to enter into newer segments like foods and beverages,

agri inputs, household insecticides and others, which broadened its market base.

Adi Godrej who had been with Godrej Soaps since 1963 successfully steered the company to newer

heights in the highly competitive FMCG sector. He ushered in more aggressive marketing skills and

innovative strategies for the growth and diversification of his company while restructuring its existing

segments. Diversification he believes needs to be viewed in terms of values and vision ensuring synergy

in the diversified products.

At the beginning of the current decade, as the Indian economy opened up under the emerging WTO

regime with mounting competitive pressures from imports of consumer goods, a landmark decision was

taken by Adi Godrej to de-merge the company’s non-core business and concentrate on the core

business of soaps and toiletries and expand it systematically through organic and inorganic growth. On

April 1, 2001 the consumer products division of Godrej Soaps was de-merged and renamed as Godrej

Consumer Products Ltd.

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Compliance with CG Norms

GCPL has complied with all the mandatory as well as some of the non-mandatory requirements of

Clause 49 of the Listing Agreement. The company was rated topmost in Corporate Governance

practices particularly for its IT based systems and processes adopted for ensuring compliance with the

regulatory norms and various other initiatives going Beyond Compliance and measures taken for

creating value for its stakeholders.

Corporate Governance Philosophy

Keeping with the Godrej Group’s tradition, GCPL has declared its dedication not only to its customers

but to all stakeholders. The company’s thrust is on delivering superior stakeholder value through

Enduring Trust and Relentless Innovation delivered with Passion and Entrepreneurial Spirit. Mr. Adi

Godrej believes that Corporate Governance is all about promoting the interests of the company as what

is good for the company is also good for the wellbeing of all the stakeholders. GCPL’s Code of Conduct

embodies the principles of honesty and integrity, care and concern for people, greater consumer

orientation, commitment to quality and enhancement of skills through training and development and

openness and transparency

Role of the Board

GCPL is a Board Driven company with eight directors of which four are Independent directors, two non-

executive non-independent directors (promoter group), one Whole-time executive director and Adi

Godrej at the top as Executive Chairman. Recently the post of Chairman and Managing Director which

was held by Adi Godrej has been bifurcated with a professional Mr.Dalip Sehgal, taking over as

Managing Director. All the Independent Directors including stalwarts like Bharat Doshi, Rama Bijapurkar

and Prof. Bala Balachandran are experts in their own fields, willing to offer quality time to the company

and capable of giving sound and varied advice on all matters including strategic matters placed before

the Board. Though GCPL is a family owned company with promoters’ shareholding at 68% ( year ending

March 2007), the views and opinions of each independent director are given considerable weightage as

they are backed by a thorough scrutiny of supportive information. Proposals are even modified based

on their suggestions and guidance.

Board meetings at GCPL generally last for half a day. In addition every year the directors have a two

day off-site meeting for an informal exchange of ideas. The Group also has a Family Council which

meets twice a year to discuss the performance of each Group company and set out the guidelines for

their growth and governance. Though GCPL is a family owned company with promoters’ shareholding at

68% in the year ending March 2007, the views and opinions of each independent director is given

considerable weightage as they are backed by a thorough scrutiny of supportive information and

proposals are even modified based on their suggestions.

xviiiNFCG

Board Evaluation

GCPL is one of the few family managed companies which undertakes evaluation of its Board members in

an informal manner though it is not mandatory under Clause 49.

Board Level Committees

GCPL has set up the requisite number of Board Level Committees which are fully committed to all the

functions of monitoring and oversight as listed in Clause 49. In fact though not mandatory, all the

members of all the committees with the exception of Shareholders’ Grievances Committee are

independent directors. GCPL has a Nomination Committee, a Compensation Committee for Employee

Stock Option Scheme and a Human Resource Committee ( in place of a Remuneration committee) in

addition to the required number of committees.

The Audit Committee carries out all the functions relating to finance, accounting, internal and external

auditing including investigations of defaults. It also reviews the whistle blower policy mechanism.


With its commitment to enhancement of shareholders’ trust and maximization of shareholder value,

GCPL complies with most of the provisions relating to disclosures in an effective manner.

Risk Management

As GCPL operates across various geographical boundaries with several collaborations and joint ventures,

it tends to face myriad risks – operational risks, financial risks emanating through fluctuations in

exchange rates and interest rates and other market related risks. Recognizing the importance of a

formal risk management system it has devised a formal risk management policy, and created a Risk

Management Committee. An independent consultancy firm has successfully created a SAP environment

for the company’s Risk Management Framework.

Internal Control Systems

GCPL’s Corporate Audit and Assurance Dept. is ISO-9001:2000 certified and issues all operating

procedures and authorizations which have adequate built-in controls. The company’s ERP system which

is MFGPro provides system based checks and controls. SAP has been implemented to ensure that the

existing processes are adequately captured with built-in control mechanisms. The internal control

system is supplemented by an extensive system of internal and external audit and periodic audit by

management.

Transactions with Related Parties

The Schedules giving transactions with related parties in GCPL’s Annual Reports are fairly detailed

unlike other family managed companies. The materially significant transactions, along with their nature

and value are presented separately for each related party individually including key management

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personnel, reflecting the company’s commitment towards a high degree of transparency in its balance

sheets.

Other Disclosures

Separate Schedules in the Annual report present all other items of disclosures like accounting policies,

remuneration of directors, contingent liabilities, investments, details of joint ventures, industry

performance, etc.

Whistle Blower Policy

With the objective of facilitating employees’ access to senior management and protecting those with the

courage to report unethical behavior, frauds and violations of the Company’s Code of Conduct, GCPL

has devised a Whistle Blower Policy, which is a non-mandatory provision. All letters received in this

respect, including anonymous letters are passed on to the internal audit department and thoroughly

investigated. For the wellbeing of its female employees the company has also introduced the Sexual

Harassment Policy.

Beyond Compliance and Value Creation for Stakeholders

Bifurcation of the Role of Chairman and Managing Director

Since April 2009, to bring in greater professionalism in the management of the company, Mr. Dalip

Sehgal has been appointed as MD of GCPL, while Mr. Adi Godrej continues as Executive Chairman.

Value Creation for Employees

The company has commissioned experts and consultants to undertake the exercise of evaluating and

assessing talent in the company and identifying competencies required at different levels. Training and

development and a well-communicated policy of succession planning has enabled the company to

identify and develop future leaders. GCPL has adopted the system of performance linked variable

remuneration wherein performance is linked to improvement in EVA. Peoplesoft a HRM software has

been installed which provides integrated solutions for performance and learning, evaluation and

deployment of employees, integrated career planning and reporting all of which are system driven and

completely transparent. A scheme of ESOPs for both employees and directors has been launched for

which the company bought shares from the secondary market. A Trust has been created for this

purpose.

Value Creation for Suppliers

The company has devised Feeder Wholesale Programs and City Wholesale Programs which ensure a

continuous line of communication between the supplier and the company which results in quicker

replenishment and fewer stock outs.

Economic Value Added ( EVA)

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GCPL has adopted the concept of Economic Value Added (EVA) as a measure of value creation for

shareholders. EVA is the excess of operating profit over cost of capital. It indicates to the management

whether the company generates enough returns to cover the opportunity cost of scarce capital. EVA has

also been used as a financial tool for structuring performance linked variable remuneration. With its

focus on increasing EVA, which has grown from Rs. 30.1 cr. in 2001-02 to 110.7 cr. in 2006-07, GCPL

has consistently attempted to enhance value for its shareholders.

Corporate Governance Rating from ICRA

ICRA’s Corporate Governance Rating seeks to examine whether the company has adopted and followed

such practices, conventions and codes as would provide its financial stakeholders a high level of

assurance on the quality of corporate governance. ICRA has assigned a CGR2+ rating to GCPL for the

quality of its Corporate Governance practices and SVG2+ for its stakeholder value creation activities.

This rating CGR2+ which was upgraded since 2002-03, implies that GCPL has adopted such practices

conventions and codes that would provide its financial stakeholders a high level of assurance on its

quality of Corporate Governance. SVG2+ implies that the company is rated highly on the composite

parameters of stakeholder value creation and management as also on Corporate Governance.

Social and Environmental Initiatives

GCPL has launched several initiatives for education, energy conservation, waste minimization,

improvements in safety and quality of its products and health of its employees. Skill development

programs have been organized to promote entrepreneurship among the youth in rural areas around its

factories.

Financial Performance

The concept of EVA which has been adopted as a measure of value creation for its stakeholders by

GCPL increased at an impressive rate of nearly 30% from Rs. 30.1 cr. in 2001-02 to Rs. 110.7 cr. in

2006-07. The company’s Market Capitalization escalated nearly 10 fold from Rs. 377.24 cr. in 2001-02

to Rs. 3320.40 cr. in 2006-07. Net profit recorded an impressive CAGR of 26% in the five year period

ending 2006-07.

(ii) Bajaj Electricals Ltd.

Based on the Bajaj Group’s values of striving for the common good and shared wealth, the corporate

governance philosophy of Bajaj Electricals Ltd. (BEL) emanates from a rich legacy of fair, ethical,

socially responsive and transparent governance practices, which while protecting the interests of all

stakeholders, ensures maximization of value for all shareholders.

xxiNFCG


Jamnalal Bajaj the founding father of the Bajaj Group valued honesty over profit, actions over words

and common good over individual good. After him, his two sons Kamalnayan Bajaj and Ramkrishna

Bajaj continued their father’s legacy, upholding the strong Gandhian principle of striving for the

common good. Rahul Bajaj the elder son of Kamalnayan Bajaj is at the helm of the Bajaj Group which

has 27 companies under its fold and a combined turnover of Rs. 20,000 cr. today.

Bajaj Electricals Ltd., headed by Shekhar Bajaj, son of Ramkrishna Bajaj, was acquired by Kamalnayan

Bajaj in 1938 and was listed on the Bombay Stock Exchange as early as in 1956. The company assumed

its present name in 1960 and till 1980 was under the able stewardship of Ramkrishna Bajaj who

championed the cause of fair business practices. He was one of the founders of the Council for Fair

Business Practices and Advertising Standards Council of India.

Starting off as a marketing company, BEL became a trusted name in millions of households in India for

a range of consumer durables, lighting products, fans and luminaires. As these products were

manufactured for BEL by a large number of small scale manufacturers and carried the Bajaj brand, the

company actively took up the promotion and up gradation of the SSIs (now renamed as MSMEs ).Due

to its core philosophy of ‘ Inspiring Trust ‘ through unstinted emphasis on customer satisfaction and

impeccable after-sales-service, the company gained the trust and confidence of all its stakeholders.

Shekhar Bajaj took over as CEO of the company in 1980 and assumed office as Chairman and

Managing Director in 1994. Under his leadership BEL made its foray into manufacturing activities in

1997-98. Commencing with the production of fans, the company expanded into the manufacture of high

masts and transmission towers in 2001. The following two years were tough for BEL due to the high

capital cost of the new project and heavy long term borrowings. This was accentuated by the slowdown

in government spending on infrastructure, heavy input costs and import liberalization. The company

was faced with the dilemma of downsizing or drastic cost cutting. Under these circumstances true to its

reputation of giving high priority to the welfare of its employees, not a single job was lost and all

possible expenditure was reduced. This was followed by a process of financial restructuring and infusion

of long term funds by way of rights shares.

Corporate Governance at BEL

Corporate Governance was started by BEL way back in 1999, much before the present regulatory

framework and Clause 49 provisions came into force. A Report on Corporate Governance was annexed

to BEL’s Annual Report for the year 1999-2000. Corporate Governance at BEL is built on the strong

pillars of Transparency, Accountability and Equitable Treatment of all shareholders.

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Compliance with Corporate Governance Norms

Code of conduct

BEL’s Code of Conduct was documented as early as in 1999. The code states that all directors, officers

and employees should not only comply with all applicable laws and regulations but must also promote

honest and ethical standards and commitment to compliance. BEL’s norms for CG lay down the policies,

procedures and rules which are defined by the applicable laws, the corporate charter and the company’s

by-laws. Business is managed ethically with built-in checks and balances ensuring that senior executives

pursue strategies that are in accordance with the corporate mission.

Role of the Board

Since the early 1960s, majority of the members on the Board of BEL have been non-executive and

independent directors though the shareholding of the promoters at BEL is high at 67% (as on Dec. 31,

2007). At present the total number of directors is nine with 60% of them being independent directors.

The company has greatly benefited through the guidance and foresight of its independent directors

which include distinguished personalities like V B Haribhakti, A K Jalan and Ajit Gulabchand. All of them

have been closely involved with the appraisal and sanction of all major proposals, formulating long term

policies and procedures for the company’s diverse range of products, management of funds and

investments and guiding the management in all major decisions. The contribution of the independent

directors in the company’s turn around and financial restructuring has been invaluable.

BEL also has a Corporate Management Council represented by the heads of each SBU, two Executive

Directors, Head of Finance, Head of Human Resources and the Heads of each manufacturing plant.


At BEL, there are two mandatory committees namely the Audit Committee and the Shareholders’

Grievances Committee, apart from five other non-mandatory committees. These include the

Remuneration and Compensation Committee, the Finance Committee, the Risk Management Committee,

the Management Committee and the Project Management Committee. The Audit Committee was formed

way back in 1998 and historically all its four members have been independent directors. The committee

has been accorded all the powers to obtain and review all the financial and non-financial information as

stipulated in Clause 49. The Committee contributes towards improving the financial performance of the

company, evaluating operating results and setting targets for each SBU, ensuring better accounting

systems. It also reviews and suggests improvements in the Risk Management and Internal Control

Systems. All other committees have been given sufficient powers to devise policies and carry out their

functions effectively.

xxiiiNFCG


Risk Management

BEL has formulated a Risk Management Policy for understanding, controlling and communicating the

company’s risk exposures while achieving its objectives. A Risk Management Committee formed since

2006-07 regularly reviews the risks and threats faced by the company and recommends suitable steps

to safeguard the company’s interests. The Risk Management Dept. and the Internal Audit dept. are

together involved in identification, categorization and quantification of risks.

Internal Controls

As required under Clause 49, BEL has set up a well defined system of delegation of authority for

sanction of expenditure, budget approvals, and administrative expenses. This delegation clearly defines

the limits of monetary sanctions at each level. The MIS provides timely and accurate information for

effective controls. The company is in the process of implementing ERP to strengthen its internal

controls. (This has since been implemented).

Transactions with Related Parties

BEL enters into a number of sale and purchase transactions with other associate companies in the Bajaj

Group and other companies in which the promoters and EDs have significant influence. Unlike most

other family managed companies all material transactions with each associate or group company and

each of the other related parties are given separately in the Annual Reports. The details include nature

of transactions, value of transactions and amount outstanding with each party in the current and

previous years. BEL invariably takes the approval of the Audit Committee for all related party

transactions.

Other Disclosures

BEL is in the practice of disclosing all other information including accounting treatment, remuneration of

directors, proceeds from public issues, details of non-compliance, industry performance and all other

information relevant to the shareholders in its Annual Reports.

Non-mandatory Requirements

Except for the formation of the Remuneration Committee, no other non-mandatory requirement of

Clause 49 has been adopted by BEL.

Though there is no Whistle Blower Policy in place the Chairman and ED are always accessible to all the

employees of the company. It has been the company’s practice to hold meetings of CMD and Senior

Management with all the employees at its respective centers every year to discuss the performance of

the company in the previous year and set targets for the following year.

xxivNFCG



The company has focused on good people related practices in terms of training, recruitment,

performance appraisal and rewards. It has a dedicated training centre at Pune. Every year BEL conducts

30-35 training programs for 800-900 employees throughout the country. BEL was the first company in

the Group to declare ESOPS for its employees in 2006-07. Two types of Schemes have been offered.

One is for the senior management personnel and the other is for all employees who have put in three

years of service. Together the schemes are applicable to nearly 500 of the 900 employees of the

company.

Value Creation for Customers and Suppliers

For the benefit of its suppliers the company has constantly introduced new product varieties and

attempted to increase its market shares. It has introduced a Dealer Privilege Club program to motivate

its suppliers.

The SBU for luminaires is committed to protecting the environment and has assisted its major vendors

to obtain ISO 14,001 certification. The SBU for Lighting has launched a dealer customer relationship

management program called JOSH which is quite successful.

Corporate Social Responsibility

In keeping with its tradition, BEL has been closely involved in several projects aimed at improving the

quality of life of people, recognition of women achievers (IMC Ladies Wing-Jankidevi Bajaj Puraskar,

empowering of rural women, poverty alleviation, environment protection (Paryavaran Mitra, a NGO) and

quality promotion(IMC Ramkrishna Bajaj National Quality Awards.


After financial restructuring, BEL’s market capitalization has grown steadily from Rs. 433.44 cr. in 2005-

06 to Rs. 749.51 cr. in 2007-08. Its PAT has also more than doubled in the same period from Rs. 29.83

cr. to Rs. 71.49 cr. ROCE has jumped from 22.14% to nearly 33% in 2007-08. The normal dividend

payout has consistently been in the range of 25-30% but it increased significantly to 60% in 2006-07

and later to 80% in 2007-08. This is evident of the company’s successful turn around after its

restructuring, with due focus on shareholder value creation.

(iii) Hexaware Technologies Ltd.

At Hexaware Technologies Ltd. corporate governance is not just an objective in isolation but it is a

means to building a customer focused, value driven organization. CG is considered to be a key driver for

sustainable corporate growth and long term value creation for stakeholders.

xxvNFCG

Hexaware is a customer-centric company with a mission to build value for customers through innovative

use of Technology and Talent.


Hexaware Technologies is a leading IT and BPO service provider. Ranked as the fastest growing mid-

sized company in India, Hexaware has attained market leadership in banking and financial services

sector, insurance, leasing, transportation and human resource development.

During 2001, Hexaware Technologies an unlisted company was merged with Aptech Ltd., a listed

company specializing in IT services and IT Training. The merged entity was named Hexaware

Technologies Ltd. Aptech’s Training division was later de-merged into another company called Aptech

Training Ltd. and subsequently Aptech Ltd. Since 2002, Hexaware has registered rapid growth with the

launch of its BPO division.

In the words of Atul Nishar, founder and Executive Chairman, the company’s growth journey has been

based on four principles of Innovation, Competencies, Relationships and Scalability.

Compliance with Corporate Governance Norms

Hexaware endeavors to maximize the wealth of its shareholders through superior levels of

accountability, integrity and transparency. It has gone a step further and adopted some of the practices

in International Corporate Governance. The company believes that the quality of governance is

influenced by integrity of its management, ability of its Board to carry out its fiduciary responsibilities,

adequacy of its management processes, quality of corporate reporting, commitment levels of individual

Board members and participation of stakeholders in management.

Code of Conduct

The code among other things, emphasizes the spirit of leadership among the directors in advancing the

vision and values of the company and an understanding of Hexaware’s business and competitive

environment, its strategies and business plans. The company gives maximum weightage to the

enhancement of value for all its stakeholders particularly its customers and strives to build their loyalty

through proactive customer acquisition, retention and value based partnerships.

Shareholding of Promoters

Unlike in most other Family/Promoter managed companies, HTL’s promoters held only 26% of its total

shareholding as on Dec. 31, 2006. FIIs/GDRs accounted for the highest 53.31% of shares.

xxviNFCG

Role of the Board

Unlike in most other Family/Promoter managed companies, HTL’s promoters hold only 26% of its total

shareholding. (as on Dec. 31, 2006). FIIs/GDRs accounted for the highest 53.31% of shares.

Hexaware’s Board is made up of 11 directors (as on Dec. 31, 2006 ) with six independent directors

offering a broad spectrum of expertise in their specialized areas and rich corporate experience. All of

them including distinguished personalities like Shailesh Haribhakti, Bakul Dholakia (Director IIM,

Ahmedabad) and L S Sarma, a senior banker, are committed to taking dispassionate decisions on focal

issues. The role of the Board is defined clearly both collectively and severely. Collectively the Board

directs and supervises the company’s affairs, provides entrepreneurial leadership within a framework of

prudent controls, formulates the company’s strategies, reviews the performance of management while

ensuring that all resources are well in place. It also sets the company’s values and standards and is

accountable to the shareholders for aligning their interests with those of the company.

All the independent directors contribute to the development of the company’s strategies and ensure the

integrity of financial information and effectiveness of internal controls and risk management systems.

They are also involved in institutionalization of transparent procedures and processes and ensuring

compliance with statutory and non-statutory norms.

Apart from the Board the company also has a Management Council headed by the Chairman. The

Council examines the progress of the company’s operations in various sectors sets long term growth

targets and determines the future areas of operations.


HTL has three Board level committees – the Audit committee, the Remuneration and Compensation

committee and the Shareholders/Investors’ Grievances Committee.

The Audit Committee

The Audit Committee generally holds six meetings in a year. The role and powers of the Committee are

in accordance with the stipulations laid down in Clause 49, including review of risk management

framework, reasons for defaults in payments, reports of internal investigators on suspected frauds and

irregularities or failure of internal controls. Going beyond mere compliance, the committee also

compares the financial performance of Hexaware with its other competitors and the company’s

performance in different geographies. This enables the committee to contribute to the expansion plans

of the company in diverse areas.

The Remuneration and Compensation Committee

In keeping with the company’s principles of compensating and retaining best talents the company has

formulated a Remuneration policy based on

xxviiNFCG

Pay for Responsibility, Pay for Performance and Potential and pay for Growth. Apart from determining

and disclosing the remuneration of all Directors and

Senior management, the committee also approves and administers the Employee Stock Option Scheme

of the company.

Shareholders’ Investors’ Grievances Committee

The committee carries out all the functions as given in Clause 49 and also continuously communicates

with the shareholders regarding the company’s services and conducts on-line surveys of the

shareholders/investors to assess their satisfaction with the company’s services.

Board Evaluation and Training

The Nomination (Remuneration) Committee conducts interviews of the directors to elicit their

observations, suggestions and preferences regarding the effectiveness of the Board’s performance. The

evaluation is carried out based on the EVA approach. Some of the evaluation parameters applied are

contribution to and monitoring of CG practices, participation in long term strategic planning,

commitment towards the fulfillment of their obligations and fiduciary responsibilities.

Hexaware undertakes regular training sessions of the Board by inviting specialists and consultants like

Deloitte Haskins and Sells and Axis Risk Consulting Services to make presentations to the Board on

various topical subjects like risk management, matters relating to Company Law amendments and

taxation, stock options, etc. These have helped the Board to take informed decisions on the proposals

presented.


Risk Management

Hexaware has framed appropriate policies and procedures for mitigating all the risks arising out of its

domestic and international operations. The company has identified internal and environmental risk

factors and devised the necessary steps to mitigate them. The Head of each Customer Business Unit

along with the accounts manager is responsible for managing the transactional risks. This is done by

focusing on major business objectives of the company and management of operations and alliances in

key global markets in relation to these objectives.

The Board of Hexaware is responsible for monitoring the risk levels on various parameters and the

management team ensures the implementation of risk mitigation measures.

The various risks identified by Hexaware are Revenue Concentration Risk, Foreign Currency Risk,

Litigation Risk, Legal and Contractual Compliance and Regulatory Risks arising out of global operations,

Disaster risks, Competition Risks, Obsolescence Risks, Human Behavior Risks and Reputation Risk.

xxviiiNFCG

Internal Control Systems

Internal Controls at Hexaware involves safeguarding the interests of the company and all its assets,

discipline in the day to day functions of the company and ensuring the accuracy and reliability of data

with suitable checks and balances. The Audit committee has appointed KPMG as the Internal Audit firm

since 2007 to ensure that all internal controls are adequate and suitably implemented.

Transactions with Subsidiaries and Related Parties

Hexaware has 15 subsidiaries of which 12 are spread over various international locations with three in

USA. All operations of the subsidiaries including loans, investments, disinvestments, transfer pricing

transactions, and action taken reports are placed before the Audit committee and the Board.

The Annual Reports of Hexaware present the nature and value of transactions for each group of related

parties i.e. subsidiaries and key management personnel. As required under Clause 49, the transactions

which are in excess of 10% of the total are given separately for each entity with details of the amount

transacted including loans, income, guarantees, investments, equity, etc.

Other Disclosures

All other disclosures required under Clause 49, like remuneration of directors, review of the industry and

outlook, effectiveness of internal controls, review of internal investigations, etc. are made in the Annual

Reports of Hexaware.

Compliance with Non-mandatory Requirements

Hexaware is one of the few companies which has complied with most of the non-mandatory

requirements.

A Remuneration and Compensation Committee has been set up. Regular training and evaluation of

Board members is taken up as mentioned above.

Quarterly financial statements are sent to the residence of the shareholders

Being listed on the London Stock Exchange, Hexaware also complies with the norms of the Blue ribbon

Committee.



Hexaware is ranked among India’s best employees and is among top 20 IT employers. An innovative

compensation structure, effective performance evaluation and development plan for employees,

conducive organizational culture, a good rewards and recognition program and net wealth creation

program through ESOPs are some of the measures to keep employee turnover at the minimum. Besides

xxixNFCG

Hexaware conducts regular training programs and seminars through its training arm ‘Hexavarsity’. An

intensive Workforce Competency Model improves the competency and technical proficiency of the

employees on a continuous basis. Employee performance management, succession planning and

leadership development are some of the other measures undertaken by Hexaware for its employees.

Value Creation for Customers

Hexaware has adopted a customer-centric philosophy in its growth momentum and this is reflected in

its differentiated product offerings, regular diversification into new segments, flexible deliveries, cost

effective offshore facilities, acquisition of specialized service providers and quest for continuous

customer satisfaction.

Value Creation for Society

Hexaware has lined up a range of services for the upliftment of poor and needy children through

various NGOs. Its special program Helping Hand from Hexaware (H3O) which is an outreach program,

takes up health and educational activities for underprivileged children in Mumbai and Chennai.


The market capitalization of Hexaware has escalated 10 fold from Rs. 258.4 cr. in 2002 to Rs. 2630 cr.

2006, with the annualized dividend pay out increasing from 50% in 2004 to 80% in 2006. With its gross

revenue rising nearly four fold since 2002, its gross profit has also risen almost four times to reach Rs.

316.44 cr. in 2006. The company has maintained a steady growth in its PAT of 68% since 2003 due to

its expansion in overseas business.

xxxNFCG

Part III

Proceedings of the Round Table on Excellence in Corporate

Governance (based on the Study - Chapters 9 & 10)

SPJIMR has been accredited by National Foundation for Corporate Governance (NFCG) as a National

Centre for Corporate Governance. Partnering with NFCG in its mission for promoting good corporate

governance practices in India, SPJIMR conducted in 2007, an empirical research study, ‘Showcasing

Corporate Governance Best Practices by Medium sized Family Managed Listed Companies –

Three Case Studies’.

The Study involved an assessment of the corporate governance practices of a selected sample of 30

family managed companies, through an analysis of their annual reports and personal interviews with the

CEOs. To showcase excellence in Corporate Governance, Case studies of three companies, which stood

out for their governance practices have been prepared.

The Report, prepared by Prof. Jiban K Mukhopadhyay (in-charge of the project) and Ms. Dolly

Dhamodiwala, Sr. Researcher, SPJIMR was submitted to NFCG in Sept. 2008.

To disseminate the findings of the Study and initiate interactions among the selected family managed

companies, NFCG and other experts in corporate governance, a Round Table was organized by the

Centre for Family Managed Business of SPJIMR in association with NFCG. The half day Round Table

organized on April 27, 2009, in the afternoon at Hotel Grand Hyatt, Mumbai, was attended by over 60

participants, including CEOs and Company Secretaries of the Family Managed Companies,

Representatives of NFCG, Mentors of Family Managed Business Centre, SPJIMR, Corporate Governance

experts and SPJIMR faculty members.

Session I of the Round Table which started after lunch was chaired by Mr. Gopal Chalam, Dean,

Centre for Corporate Research and Training, Institute of Company Secretaries of India. Prof. Sesha

Iyer, Director, SPJIMR welcomed the participants and familiarized them with the management

programs conducted by SPJIMR and the various other activities of the Institute. Prof. Parimal Merchant,

Chairperson, Family Managed Business Centre then spoke about the activities of the Centre for Family

Managed Businesses pioneered by SPJIMR, since 1997. This was followed by the Keynote address by

Mr. Vijay Kapur, Director, Institute of Chartered Accountants of India. After explaining the role &

functions of NFCG, Mr. Kapoor spoke on several important issues relating to Corporate Governance in

India & abroad. Emphasizing that he is an advocate of free market, he explained the concept of

Corporate Governance with reference to Cadbury Committee, focused on the governance issue in Indian

xxxiNFCG

companies through three specific periods since independence. Focusing on the post reform period, he

mentioned that there were a number of regulatory failures rather than ethical failures (e.g. Harshad

Mehta scam etc). He also mentioned that issues relating to Corporate Governance in Family Managed

Business essentially focus on ownership & control in the hands of the promoter rather than the so called

Independent Directors. He said that the best way to improve Corporate Governance in Family Managed

Businesses is to involve the owner director himself rather than the independent directors. He

emphasized that the regulatory system should incorporate suitable incentives to do the right thing along

with appropriate accountability for failures to do the right thing. According, to him Corporate

Governance should evolve as an academic Normative science.

Prof. Jiban Mukhopadhyay made a presentation on the Findings of the Study. He highlighted the

corporate governance practices of 30 surveyed companies with regard to their compliance with the

prescribed regulatory norms and also described several other initiatives taken by the companies which

went beyond the mandatory requirements of compliance and enhanced value for all the stakeholders of

the company. He also elaborated the methodology adopted for rating and identifying three companies

with relatively superior corporate governance practices, which were finally selected for the Case Studies.

He discussed the major issues arising out of the Study, such as the factors which motivated the family

managed companies to pursue better governance practices, the contribution of the independent

directors and the need to strengthen their role, the areas of governance which needed further

strengthening like risk management, internal controls and disclosures, the constraints of these

companies while complying with the regulatory requirements, etc. The session ended with questions on

the findings of the Study.

The second session was chaired by Mr. Vijay Kapur. This session commenced with a presentation of

the Corporate Governance practices of Godrej Consumer Products Ltd. (GCPL) by Mr. Adi Godrej,

the then Chairman and Managing Director, and presently Executive Chairman. Mr. Godrej advocated

principle based governance system, which, in his opinion, would be more effective than a rule based

system. He emphasized that one of the most important principles of corporate governance is strong

performance of the company. His company’s policy has been to invite highly professional persons on

the Board as independent directors and take advantage of their expertise in specialized areas like

finance and accounting, strategy formulation, legal issues, etc.

One of the most important principles of Corporate Governance, according to Mr. Godrej, was

Performance – Financial, Operational & Strategic. For this a strong link had been evolved between the

interest of the company & the interest of the employees. This was carried out by :

a) A system of Performance linked Variable Remuneration for which a concept of Economic Value

Added (EVA) was used and

b) A well structured system of incentives through ESOPs.

xxxiiNFCG

He went on to elaborate his company’s policy of appointing only independent directors on all his board

level committees, the remuneration policy laid down for the independent directors, the Corporate

Governance Rating received by GCPL from ICRA and the Godrej Group’s policy on creation of value for

the Society through various philanthropic activities.

Mr. R Ramakrishnan, Executive Director, Bajaj Electricals Ltd. (BEL) made a detailed presentation

on the Corporate Governance initiatives of his company. Tracing the history of the Bajaj Group of

companies since the early 1900s, he explained how Shri Jamnalal Bajaj and his successors had built the

relationship of trust and respect between providers and users of goods and services. He explained that

his company had adopted three basic principles of good governance, which are Transparency,

Accountability and Equitable Treatment. He observed that BEL had an embedded culture of having truly

independent directors who supported the promoters in upholding these principles, while helping them in

strategy formulation and also execution. He went on to describe the formation of the company’s

Consumer Grievance Cell, which had generated a great deal of trust and goodwill among the

consumers. Value creation for employees was through ESOPs, which covered majority of their

employees. He then highlighted some of the issues relating to CG in India like the need for greater

shareholder activism, lack of formal evaluation of the Board, need for the Board to have greater access

to senior management, need for better internal vigilance and the strong role to be played by

institutional directors on the Board to improve corporate governance .

Mr. Deependra Chumble, Chief People Officer, Hexaware Technologies Ltd., in his presentation,

described the CG practices of Hexaware. He explained his company’s policy of openness and

transparency and the continuous access his Board has with the company’s Senior Management. At

Hexaware he mentioned that the Board and senior management are together involved in the process of

strategic planning and risk management. Being an IT company Hexaware had the unique advantage of

putting in place appropriate processes and technologies for monitoring and control on a real time basis.

The employees of the company are being encouraged to keep in mind a longer perspective even in a

period of slowdown through continuous communication from the top. The company has also invested in

an elaborate program of training and development through its concept of Hexavarsity.

During the Question-Answer sessions there were questions from the audience on a range of issues

(Chapter 10) like separation of roles of Chairman and MD, rotation of auditing firms of companies or

rotation of engagement partners, peer reviews of Licensing of qualified accountants and auditors, etc.

The need to carry out an empirical study to establish a link between corporate governance and

company’s performance, the need for training and evaluation of board members, better contribution

from independent directors in important board decisions, and other related issues were brought into

focus.

The vote of thanks was given by Prof. Jiban K Mukhopadhyay.

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Part IV

Concluding Observations and Recommendations based on the Study and Round Table

Concluding Observations based on the Study (Chapter 5)

i) Our study of the 30 Family Managed Medium sized Companies has brought to light several

disparities in the responses of the companies to the increasing emphasis on better Corporate

Governance practices. While some companies (essentially the eight selected companies) have

already showcased best corporate governance practices, there are others which are yet to fully

recognize the benefits of good governance, which has to go beyond mere mandatory

compliance.

At the same time, an increasing number of Family Managed Medium sized Companies have

realized that it is not the financial compliance alone but also the enhancement of company

value and value for all its stakeholders that will earn them greater investor confidence.

ii) A major motivating factor behind the adoption of better Corporate Governance Practices is the

growing global exposure of these companies.

iii) Our study has shown that the relatively larger sized firms which have gone in for expansion

through global acquisitions and diversification into advanced/emerging markets through

subsidiaries and joint ventures, have developed sophisticated models for risk management,

information dissemination and internal controls.

iv) It was also observed that the majority of the surveyed companies had commenced Corporate

Governance Practices in a formal manner only after the first announcement of SEBI Clause 49

in 2000 and completed the process only after compliance was made compulsory since January

2006.

Prior to this however, some of the larger sized Family Managed Companies had taken some

initiatives like setting up an audit committee or appointing independent directors on their

Boards or restriction of insider trading.

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v) The survey has brought to light the frequently discussed issue of the relationship of the

promoters – usually Chairman and Managing Director – with the other Board members,

essentially the independent directors. Balanced Boards with active independent directors have

been able to steer their company towards its identified goals in an effective and ethical

manner.

vi) In some companies, the longer tenure of all the directors including the Chairman and

Independent Directors, spanning 10-15 years has deprived the Boards of fresh ideas which

might have, at least to some extent, slowed down the improvements in governance practices.

Training and evaluation of Board members is hardly visible except in an informal manner by a

few companies.

vii) Due to the absence of a succession policy and well-defined criteria for appointment of

successors, the senior management personnel and independent directors refrain from

proposing long term policies, which would have an impact on company’s operations.

vii) It was only in a few larger sized companies that the Chairman had engaged the independent

directors in strategic decisions relating to the growth and expansion of the company. At the

Round Table it was agreed that the Independent Directors should give frank and unbiased

advice to the promoters and the Board on all issues including strategic issues. They should

preferably be all professionals and should be able to spare quality time for the company.

viii) Companies in which the Chairman had reduced his influence on Board decisions and imbibed a

consultative board culture were able to record a better performance – both financial and

operational. These were also the companies which had attracted global investments at a

higher premium.

ix) The shareholding pattern in Family Managed Companies surveyed has been more skewed in

favor of the promoters. Due to their higher shareholding, promoters are able to exert

significant control in the company at times to the detriment of minority shareholders. As the

shareholding with the public is small and shares are not frequently traded in the market, there

is a dearth of vigilant and active shareholders.

x) Some of the more serious governance concerns in family managed companies surveyed were

lack of clarity regarding the ownership of the company, its relations with other unlisted

companies in the Group or holding companies, the dominant influence of family councils on

board decisions, the tendency of the promoter CEO to avoid losing control on the Board and

the difficulty in ascertaining the actual status of independent directors.

xi) Inadequate information regarding the company and its operational strategies, lack of

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transparency and inadequate disclosure of transactions with related parties including

subsidiaries and associate companies were other major factors impacting on corporate

governance.

xii) The role of the Institutional investors and analysts has gained significant importance with more

detailed information being demanded by them which is a healthy trend and has lead to greater

transparency.

xiii) The Corporate Governance Practices which need further strengthening by the Family Managed

Companies are risk management, internal controls and disclosures of transactions with related

parties. An IT based system of real time checks and a good MIS system needs to be put in

place for this purpose.

xiv) Some of the non-mandatory provisions of Clause 49, like the Remuneration Committee,

Whistle Blower Policy, Training and Evaluation of Non-Executive Board members have been

complied with by some of the companies at least in an informal manner and have had a

positive impact on the overall governance of the company. Training and evaluation would place

greater responsibilities and commitment on the non-executive directors.

xv) Finally, compliance is important and is ensured but when there is a slippage there is no

mechanism for holding the errant person accountable. Continuous monitoring of compliance

procedures is required and offenders need to be held responsible for non-compliance. The

family managed companies need to strengthen their accountability norms.

Some Pertinent Issues and Recommendations

In SEBI Clause 49, there are a large number of parameters of Corporate Governance, including the

mandatory and non-mandatory ones. These are to be complied with by all listed companies. As a result,

some of the smaller sized companies are not able to comply with all the stipulations of this ‘One Size fits

all’ type of Clause. Smaller sized companies having asset size of say Rs. 3 cr. may not be able to invest

in the type of systems, procedures and manpower required to comply with all the requirements in the

same manner as done by large companies.

The study has also highlighted the problems relating to compliance with all the stipulations by the

medium-sized companies.

xxxviNFCG

A detailed study of the application of Clause 49 with a differential approach for companies in smaller

size groups, or age or types of operations needs to be carried out. NFCG may also consider organizing

a brainstorming seminar or workshop on this issue.

,

Issues regarding the role of the independent directors on the Boards of listed companies were discussed

at length. These have also been brought out in our Study. Issues regarding the role and responsibilities

of independent directors and the effectiveness of their contributions need to be further looked into.

NFCG may consider sponsoring a study to assess the contributions of the independent directors on

Boards of listed companies through a survey of independent directors.

Disclosures and related party transactions in family managed businesses, where other unlisted

companies or holding companies control the listed companies, the concept of lead independent

directors, or greater involvement of independent directors is called for. This could be facilitated by

dissemination of detailed information on all relevant issues to the independent directors. Besides, the

training and evaluation procedures of the independent directors also need to be strengthened.

Succession policy related issues are also important.

Some Recommendations based on the Proceedings of the Round Table

(Chapter 11)

A number of issues relating to Corporate Governance practices have been raised in the Study (as

already discussed) as well as at the Round Table. Certain recommendations specifically arising from the

proceedings of Round Table are mentioned below:

• As there are large numbers of small size listed companies in India, it needs to be considered

whether Uniform Application of Clause 49 to all listed companies should be suitable for small

sized companies. Such companies may not be in a position to incur additional cost for installing

necessary infrastructure or invest in the requisite systems etc. for introducing elaborate CG

practices. In the light of the above, a differential approach relating to the application of Clause

49 may be considered to be adopted for small sized / newly listed companies towards

compliance with CG norms. NFCG may consider organizing a study / seminar on this important

issue.

• There are number of Non-Mandatory Provisions relating to CG compliance under Clause 49 like

Remuneration Committee, Training & Evaluation of Non-Executive Directors. It is

recommended that there should be a relook at the non-mandatory CG practices particularly

relating to Training & Evaluation, Remuneration Committee etc. A formal system of Board

Evaluation may be considered to be made mandatory.

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• At the Round Table, several eminent participants discussed about Company Performance and

CG Practices and their relationship. It was recommended that a study needs to be undertaken

to assess this relationship (incidentally, SPJIMR is already conducting such a study, sponsored

by NFCG).

• Issues relating to Higher Shareholding of Promoters have been discussed at the Round Table

at length. While Mr. Adi Godrej explained his view that higher promoter shareholding is not

detrimental to the interest of minority shareholders, there are reports that the listed Indian

companies may have to increase their public shareholding upto 25 % of the total. It is time

that the regulatory authorities should come out with a well thought out approach on this issue.

• There is a need for clearly defining Independent Directors and prescribe how exactly they

should be empowered, particularly after the Satyam episode. NCFG may consider sponsoring a

study on these issues.

• There is a need for strengthening Risk Management & Internal Control System like installing a

system of real time checks, an ERP – SAP solutions as well as suitable MIS in all listed

companies.

• There is a great deal of variation between companies, irrespective of their size, regarding

Disclosure of Related Parties Transactions. The nature of transactions made between related

parties should be defined not only in quantitative terms but also in qualitative terms.

• Issues relating to Rotation of Auditors & Auditing Partners also have been discussed. It was

agreed that rotation of engagement partners and not auditing firms after a certain period

would prove to be a better option for solving the problems of audit complacency.

• Clause 49 does not give any guidelines relating to succession planning, which could be a very

critical issue. Certain regulatory framework needs to be laid down providing the minimum

guidelines for drawing up the Succession Policy based on the company value, its mission &

objectives.

Ministry of Corporate Affairs and the SEBI may consider bringing out a document highlighting the needs

for implementing the spirit of Corporate Governance Practices as a Responsibility by all corporate

entities, listed, about-to-be listed, PSUs etc.

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Future Outlook

At present SEBI Clause 49 and the Companies Act 1956 form the architecture for Corporate Governance

norms. The overall regulatory structure relating to Corporate Governance has been evolving since 2006.

It is yet too soon to evaluate whether all the listed companies are able to comply with all the regulations

of SEBI.

Meanwhile, some regulations with respect to Clause 49 are also being reviewed by experts. The

Bill(2010) for re-legislation of Companies Act 1956 has been placed before the Parliament, but is yet to

be enacted. After the Satyam debacle, there is a need for more carefully looking into Corporate

Governance regulatory processes as well as their implementation. Our study and the Round Table have

suggested a number of points on these pertinent issues.

Thus, there is a need to evaluate the existing mechanism for compliance so as to add value and bring in

greater flexibility and hence, compliance in spirit, and not just in letter.

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