Notes byDr. Anil Gor.M.Com, LL.M.,M.F.M,Ph.D.,FCS,CAIIB.E Mail : goranil@yahoo.co.in Mobile 09322242439NLDIMSR*Corporate Governance

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Corporate GovernanceNLDIMSR*Problems in Corporate Governance:Vanishing Companies: Between 1991 and 1996, out of 3900 companies which offered IPO, 2500 have vanishedThere are over 1.36 lakhs companies which are defaulting in complying with requirements of Company LawThere are about 2481 sick companiesThere is significant no of companies which have not paid any dividends since 1996

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Corporate GovernanceLatest Developments:SatyamLibor fixation by Senior executives of international banks.Five Large Banks: RBS, Citi group, HSBC, JP Morgan Chase and Deutche Bank were collectively fined $3.3 billion by Swiss Regulators for manipulating LIBOR.Common Wealth Games ScamTelecom Licenses : 2G scamCoal mining allocations scam Coalgate scamRajat Gupta Insider Trading scamSharda Investment Fraud in W.BengalNSEL fraud.

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Corporate GovernanceConsider this:Moral failure pervaded our public life :One out of every five members of Indian parliament elected in 2004 had criminal charges against himA Harvard Professor found that one out of every four teachers in Govt primary schools is absent and one out of every four is simply not teaching.A world bank study found that two out of five doctors do not show up at primary health centres and that 9% of their medicines are stolen.

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Corporate GovernanceA cycles rickshaw driver in Kanpur routinely pays a fifth of his daily earnings in bribes to the police.A farmer can not hope to get a clear title to his land without bribing a revenue official and that too after a humiliating ordeal of countless visits to the revenue office. - Gurcharan Das : Difficulty of Being Good.NLDIMSR*

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Corporate Governance

With uplifted arms I cry, but no one heeds;From Dharma flow wealth and pleasure,Then why is dharma not pursued ? - Mahabharat : XVIII .5.49NLDIMSR*

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Corporate Governance Jack Welch :You must be public about consequences of breaking core values. I dont want to wake up one day with a profitable corporation that does not have soul.NLDIMSR*

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Corporate GovernanceReasons for Poor Corporate Governance in India:Feudal mid set that exists in IndiaManifold restrictions set by GovernmentLack of concern for societySense of insecurity that prevails amongst the very people who are supposed to inspire a sense of confidence about the company among the stake holder populationGreed and EgoNLDIMSR*

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Corporate GovernanceNLDIMSR*What is Corporate Governance?

Corporate Governance is the social, legal and economic proceess in which companies function and are held accountable. It is the system by which companies are run-Cadbury Committee Report.

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Corporate GovernanceNLDIMSR*Corporate Governance is the exercise of power in responsible waySir Adrian Cadbury.Two identifiable strands of thinking:Some experts feel that Corporate Governance is the system, procedures, and institutions that ensure that the management acts in the best interests of the owners i.e., Shareholders.

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Corporate GovernanceNLDIMSR*Second school of thought believes that the management has to act in the best interest of all its stake holders which may include customers, employees, suppliers, creditors and the society of which the organization is a part.Few more definitions:James D. Wolfensohn : Former president, World Bank : Corporate Governance is about promoting corporate fairness, transparency and accountability.

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Corporate GovernanceNLDIMSR*Standard & Poor:Corporate Governance is the way a company is organized and managed to ensure that all financial stakeholders (Shareholders and Creditors) receive their fair share of companys earnings and assets.

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Corporate GovernanceNLDIMSR*CII : Corporate Governance deals with laws, procedures, practices and implicit rules that determine a companys ability to take informed managerial decisions vis--vis its claimants, in particular, its shareholders, customers, the employees and the state. There is a Global consensus about the objective of good governance: Maximizing Long Term Shareholder Value

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Corporate GovernanceNLDIMSR*Kumar Mangalam Birla Committee:Strong Corporate Governance is indispensable to resilient and vibrant capital markets and is important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.

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Corporate GovernanceNLDIMSR*Theories associated with development of corporate Governance : Agency Theory Transaction Cost Economics Stakeholder TheoryStewardship Theory

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Corporate GovernanceNLDIMSR*Agency Theory :Agency theory identifies the agency relationship where one party, the principal , delegates work to another party , the agent.Problems in agency relationship are :Agent not acting in the best interest of the principal, misusing powers for pecuniary or other advantages and not taking appropriate risks.

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Corporate GovernanceNLDIMSR*In the context of corporations, and issues of corporate control, agency theory views directors as agents.Cost resulting from misuse of their position as well as cost of monitoring and disciplining them so as to prevent abuse are called agency costs.Much of the agency theory as related to corporations is in the context of separation of ownership and control.

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Corporate GovernanceNLDIMSR*Transaction Cost Economics ( TCE ) Theory views firm as a corporate governance structure.The resources of the economy are used by an entrepreneurs by forming an organisation called firm so as to carry out transactions at less cost . And as the firm grows in size , its costs comes down.In its turn, firm becomes larger and more transactions it undertakes, and will expand up to the point where it becomes cheaper or more efficient for the transactions to be undertaken externally. TCE assumes that costs can be reduced by appropriate corporate governance structure.

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Corporate GovernanceNLDIMSR*Stake Holder Theory :The stakeholder theory takes account of wider group of constituents , rather than focusing on shareholders. The stakeholders would include the employees , the suppliers, the consumers, the lenders and creditors , the society and the Government, all of them have stake in the business and therefore their interests must be taken care of for sustainability of business.

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Corporate GovernanceNLDIMSR*Stewardship theory :The stewardship theory regards directors as stewards of the companys assets and they will act in the best interests of the company. This theory permits the powers of CEO and Chairmanship of Board may be combined .

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Corporate GovernanceDevelopment of Corporate Governance :Important Inter national Committees :Cadbury committee (1992)Greenbury committee (1995)Hampel Committee (1998)LSE Combined Code (1998)OECD Principles of Corporate Governance (1999)Blue Ribbon Committee (1999)Surbanes Oxley Act 2002.NLDIMSR*

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Corporate Governance Corporate Governance Reforms in India :Important Committees in India:CII : Voluntary Code of Corporate Governance (1998)Kumar Mangalam Birla Committee (2000)RBI Report of the Advisory Group on Corporate Governance (2001)Naresh Chandra Committee ( 2002)Narayan Murthy Committee (2003)JJ Irani Committee (2005)

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Corporate GovernanceNLDIMSR*Characteristics Principles:TransparencyIndependenceAccountabilityResponsibilityFairnessSocial Responsibility

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Corporate GovernanceNLDIMSR*Objectives:That a properly structured Board capable of taking independent and objective decisions in placeThat the Board is balanced as regards the representation of adequate number of non executive and independent directors who will take care of the business and well being of all the stakeholders.

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Corporate GovernanceNLDIMSR*Objectives:That Board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information.That the Board has effective machinery to subserve the concerns of stake holders.That the Board keeps the stakeholders informed of relevant developments impacting the company.

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Corporate GovernanceNLDIMSR*Objectives:That the Board effectively and regularly monitors the functioning of the management team.That the Board remains in effective control of the company at all the times.The overall endeavor of the Board should be to take the organization forward to maximize long term value and shareholders wealth.

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Corporate GovernanceNLDIMSR*How is Corporate Governance Enforced?Companies Act, 2013Through the listing Agreement with Stock Exchange.Through independent well published ratings of companies on Corporate Governance.Through institutional activism.Through self regulation

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Corporate GovernanceNLDIMSR*Scheme of Management under Companies Act, 2013:Separation of Ownership and Control:Shareholders provide equityShareholders appoint Board of DirectorsBoard of Directors appoint team of management for day to day operationsShareholders also appoint independent professional to report to them ie, Auditors.

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Corporate GovernanceNLDIMSR*Companies Act, 2013 provides for:Detailed provisions for qualifications, appointment, powers and removal of directors including restrictions on powers:Powers to be exercised in the Board meetingPowers to be exercised with the consent of the members of the company.

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Corporate GovernanceNLDIMSR*Manner in which P&L, balance Sheet, Directors report, Management Discussion & Analysis, Corporate Governance reports are to be preparedManner in which AGM/EOGM are to be conducted.Secretarial audit for all listed companies.

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Corporate GovernanceChanges introduced by Companies Act 2013 :

Sec. 2(51) : Key Managerial Personnel :i) CEO or MD or Managerii) Company Secretaryiii) Whole time Directoriv) CFOv) Any other person notified.

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Corporate GovernanceSec.135 : CSR : Schedule VII List of CSR activitiesSec.149 : Independent Director Sec166 : Composition of Board : Duties of DirectorSec.197 : Remuneration CommitteeSec. 205: Functions of Co secretary and Secretarial audit

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Corporate GovernanceComposition of the Board : Every listed public limited company to have at least one third of the total directors as independent, reason being that these directors, not connected with promoter group, will ensure that the board decisions are taken objectively in the interest of the company and not to serve the private interests of the promoters. The Act has also provided specific definition and eligibility criteria in addition to providing for code of conduct of independent directors (Sec.149) including requirements of evaluating the performance of independent directors. ( Schedule IV of Companies Act 2013).NLDIMSR*

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Corporate GovernanceRequirement of Resident Director and woman directorRequirement of at least one Resident Director and one woman director has also been introduced, so that it should not happen that no responsible person is available in case of companies promoted by foreign investors having foreigners as directors. The woman director is expected to provide gender sensitivity to the Board.NLDIMSR*

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Corporate GovernanceLimit to maximum number of directorship to be held by individuals :Limit of 20 directorship with sub limited of 10 directorship in public limited companies, has been introduced for any individual to hold the position of a director so that the person acting as director should not be overburdened resulting in impact on quality of contribution of a director at Board meetings.NLDIMSR*

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Corporate Governance Audit Committee of Board of Directors: ( Sec.178)The Board of Directors of every listed companies is compulsorily required to have Audit Committee of the board consisting of minimum three independent directors. This audit committee will inter alia, look into :the recommendations for appointment, remuneration and terms of appointment of auditors of the company.Review and monitor auditors independence , performance and effectiveness of audit process.examination of financial statement and auditors report thereon.NLDIMSR*

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Corporate Governanceapproval or any subsequent modification of transactions of the company with related parties.scrutiny of inter corporate loans and investments.valuations of undertakings or assets of the company wherever it is necessary.evaluation of internal financial controls and risk management systems.Monitoring the end use of funds raised through public offers and related matters.The Audit committee with majority of independent directors will ensure control function of the Board is objectively excercised.NLDIMSR*

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Corporate GovernanceNomination and Remuneration Committee of Board of Directors: ( Sec.178):The process of selection, nomination and remuneration of Directors has been introduced whereby Nomination and Remuneration Committee consisting of three non executive directors of which not less than one half will be independent directors, will decide the recruitment criteria, search for suitable persons and formulate remuneration policy for directors, key managerial personnel and employees. Again, objective is to have unbiased and independent exercise of powers of the Board of Directors in the overall interests of the company.NLDIMSR*

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Corporate GovernanceStakeholders Relationship Committee: ( Sec.178(5)&(6)):The Board of Directors of a company which has more than one thousand shareholders, debenture holders, deposit holders and any other security holders, shall appoint Stakeholders Relationship Committee consisting of a chairperson who shall be non executive director and such other members as may be decided by the Board. The objective is to address to shareholders grievances promptly and systematically at a seniors level ie, Committee of Board of Directors.NLDIMSR*

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Corporate GovernanceRestrictions on powers of the Board of Directors:The Companies Act, 2013 has restricted loans to the directors, Employees Stock Option Scheme (ESOP) to independent directors, and imposed process restrictions for entering into loans related party transactions. The company would require the approval by members by way of special resolution for entering into related party transactions. Further, directors are prohibited to enter into forward transactions in securities of the company or its holding company or subsidiary companies.NLDIMSR*

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Corporate GovernanceSecretarial audit :Secretarial audit has been made compulsory for listed as well as large companies.Compliance certificate :The annual return, filed by a listed companies and companies having Rs.10 cr. Turnover, shall be certified by practicing company secretaries in practice, certifying that annual return , discloses the facts correctly and adequately and that company has complied with all the provisions of Companies Act.

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Corporate GovernanceStrengthening whistle blowing policy:The Companies Act has strengthened the whistle blowing policy offering protection to employees and giving hem direct access to chairman of audit committee. Further, auditors, are required to immediately report to the Central Government, any offence involving fraud that is being or has been committed against the company by its officers or employees. The provisions of whistle blowing policy also applies to Cost auditor as well as secretarial auditor.NLDIMSR*

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Corporate GovernanceRotation of Auditors:The companies Act provides for compulsory rotation of auditors : individual auditor-every five years and firm of auditors every ten years. Further auditors are prohibited to from rendering services of accounting and book keeping, internal audit, design and implementation of management information system, actuarial services, investment advisory or investment banking services, any outsourced financial or management services.NLDIMSR*

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Corporate GovernanceCorporate Social responsibility (CSR):Every company fulfilling any one of the criteria: Net Worth of Rs.500 cr. Or Turnover of Rs.1000 cr or net profit of Rs.5 cr, should spend 2% of average net profit of last three years on projects of social welfare listed in Schedule VII of the Companies Act. Further the Board is required to have CSR policy and also have CSR committee for implementing and monitoring CSR policy of the company. NLDIMSR*

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Corporate GovernanceListing Requirements: Overview:SEBI Guidelines : Cir. Dated 17th April ,2014:Objectives of the guidelines/ principles:A. Rights of shareholdersB. Role of StakeholdersC. Disclosures & TransparencyD. Responsibilities of the Board Disclosure of Information Functions of Board Composition of Board

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Corporate Governance Independent DirectorsD. Board committeesE. Code of ConductF Whistle Blower PolicyNLDIMSR*

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Corporate GovernanceA. Rights of Shareholders:The company should seek to protect and facilitate the exercise of shareholders rights :Right to participate in and to be informed on, decisions concerning fundamental corporate changesOpportunity to participate and vote in general meetings of shareholdersTo be informed of the rules including procedures that govern general shareholders meetingsOpportunity to ask questions to the BoardNLDIMSR*

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Corporate GovernanceParticipate in key corporate governance decisions such as the nomination and election of the board membersExercise of ownership rights of shareholders including institutional shareholdersAdequate mechanism to address grievances of shareholdersMinority shareholders to be protected.Timely and adequate information : on date ,location and agenda of the meeting.Timely and adequate information on capital structure arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownershipInfo on rights attached to all shares classes of shares before the issueNLDIMSR*

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Corporate GovernanceThe company should ensure equitable treatment to all shareholders including minority and foreign shareholdersB. Role of stakeholders in corporate Governance:Rights of stakeholders established by law and through mutual agreements are to be respected.Stakeholders to have opportunity obtain effective redress for violation of their rights.Company should encourage employee participationAccess to relevant , sufficient and reliable information on timely and regular basisEffective whistle blower policy

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Corporate GovernanceC. Disclosure and Transparency :All material matters including financial position, performance, ownership and governance of the company.Information to be in accordance with standards of accounting, financial and non financial disclosuesNLDIMSR*

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Corporate GovernanceD. Responsibilities of the Board :1. Disclosure of information by the members of the Board: whether they have directly or indirectly or on behalf of third parties, a material interest in any transaction or matters affecting the company.Maintain operational transparency to stakeholders at the same time maintaining confidentiality of information NLDIMSR*

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Corporate Governance2. Key Functions of the Board:A. Reviewing and guiding Corporate strategy, major plans, setting performance objectives, monitoring implementation and corporate performance and overseeing major capital expenditure , acquisitons and investments.B. Monitoring the effectiveness of companys governance practices and making changes as needed.C. Selecting, compensating, monitoring and when necessary, replacing key executives and succession planning.NLDIMSR*

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Corporate GovernanceD. Aligning key executives and board remuneration with larger term interests of company and its shareholders.E. Ensuring a transparent board nomination process with diversity of thought, experience, knowledge ,perspective and gender in the board.F. Managing and monitoring potential of conflicts of interest of managementG. Ensuring the integrity of the companys accounting and financial reporting systems including the independent auditH. Overseeing the process of disclosure and communicationsI . Monitoring and reviewing Board Evaluation Framework.NLDIMSR*

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Corporate Governance3. Composition of the Board :The Board of Directors shall have an optimum combination of executive and non executive directors with at least one woman director and not less than 50% the directors comprising non executive directors.Where chairman is non executive director , at least 1/3rd of the Board should be comprise of should comprise independent directors and in case Board does not have regular non executive Chairman, at least one half of the Board should comprise of independent directors.NLDIMSR*

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Corporate Governance4. Independent Directors:Independent director means a non executive director other than nominee director of the company.Person of integrity and possessing relevant expertise and experienceWho is and was not a promoter of the co or its holding, subsidiary or associate coWho is not related to promoters or directors in the co, its holding, subsidiary or associate co.Apart from receiving directors remuneration has no other pecuniary relationship with holding , subsidiary or associate co during current and previous two financial years

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Corporate GovernanceNone of whose relatives to have pecuniary interestsWho, neither himself nor any of his relatives i) hold key managerial position in the co, its holding subsidiary or associate co,( in any of three previous financial years) ii) has been employee , or promoter or partner in any of three previous years of a firm of auditors or co secretary or cost auditor , legal or consulting firm of the co, its holding subsidiary or associate co, with fees amounting to 10% of turnover of the co. iii) holding with his relatives 2% or more of total voting powerNLDIMSR*

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Corporate GovernanceIs a chief executive or director by whatever name called , of a non profit org that receives, 25% or more of its receipts from the co., any of its promoters, directors holding 2% or more of its voting powerIs a material supplier, service provider or lessee or lessor of the co.Who is not less than 21 years of age.NLDIMSR*

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Corporate GovernanceLimit on Number of Independent directorship :A. A person shall not serve as an independent director in more than seven listed companies.Further, any person who is whole time director in any listed company, shall serve as an independent director in not more than three listed companies.Maximum tenure of independent Directors:Independent directors shall hold office for a term up to five consecutive years.Shall be eligible for reappointment for further term up to five years on passing special resolution.NLDIMSR*

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Corporate GovernanceFormal Letter of appointment must be issued to independent director and letter of appointment and profile of independent director must be disclosed on the website of the company and stock exchanges not later than one working day from the date of appointment.Performance Evaluation of Independent directors:The nomination committee to lay down the criteria for performance evaluation of independent directors.Performance evaluation criteria to be disclosed in Annual ReportPerformance evaluation to be done by the entire board . ( other than independent director concerned.)NLDIMSR*

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Corporate GovernanceSeparate Meetings of the independent Directors: Independent directors of the company to have one independent meeting without the attendance of other directors Independent Directors at this meeting will :Review the performance of non independent directorsReview the performance of Chair person of the company,Assess the quality, quantity and timeliness of information flow between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

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Corporate GovernanceTraining of Independent Directors:The company to provide training to independent directors to familiarize them with the business of the company.Details to be disclosed in Annual report.NLDIMSR*

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Corporate GovernanceNon Executive Directors Compensation and disclosures:All fees /compensation, if any paid to non-executive directors, including independent directors , shall be fixed by the Board of Directors and shall require prior approval of shareholders in the general meeting Other provisions with regard to Board meetings:The Board to meet at least 4 times in a yearMaximum gap between two meetings : 120 daysA director can not be a member in more than 10 committeesNLDIMSR*

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Corporate GovernanceDirector can not be a chairman of more than 5 committees across all companies in which he is a director. Further, he will inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.The Board to review periodically, compliance reports of all laws applicable to the company, prepared by the company as well as steps taken by the company to rectify instances of non compliances.Vacancy caused by resignation or removal of independent director to be filled in within three months of the resignation.Board to satisfy itself of orderly succession plans.

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Corporate GovernanceCode of conduct:The Board shall lay down code of conduct for directors and senior management.All the members of Board and Senior management must affirm compliance with code on annual basis and CEO to give declaration in writing to that effect in Annual Report.Code of conduct to incorporate duties of directors

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Corporate GovernanceDuties of Directors : Sec.166 :Directors to Act subject to provisions of the Act, as per Articles of the Company .To act in good faith to promote objects of the company for the benefit of members as a whole and in the interests of the company, employees, shareholders, the community and fo the protection of environment.To exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.Shall not involve in a situation in which he may have a direct or indirect interest that may conflict with interests of the co.

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Corporate GovernanceDuties of directors contd.-Shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.Shall not assign his office and any assignment so made shall be void.If any director of the company contravenes the provisions of this section such director shall be punishable with fine which shall be not less than Rs. 1 lakh and may extend up to Rs.5 lakh.NLDIMSR*

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Schedule IV deals with code of conduct for independent directors and includes:Guidelines for professional conduct- standard of ethics, integrity etc.Role and Functions: bringing independent judgment to bear in board deliberations on the issues relating to strategy, performance, risk management, resources, key appointments and standard of conduct etc.DutiesManner of appointments / reappointment/removal/resignation

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Corporate GovernanceIII Audit Committee:A. Qualified and independent audit committee to be set up subject to 1. Minimum 3 directors as members, two third of the members to be independent directors.2. All members to be financially literate.Financially literate means the ability to read and understand basic financial statements such as Balance sheet P&L a/c and cash flows3. Chairman of the Audit committee to be independent director. NLDIMSR*

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Corporate Governance4. Chairman of Audit Committee to be present at AGM.5. Audit Committee may invite such executives, as it considered appropriate. The Finance Director, the head of internal audit, and a representative of statutory auditor may be present as invitees for the meeting of the audit committee.6. Company secretary to act as the secretary to the committee.Meetings of Audit Committee: Audit committee to meet at least 4 times in a year and not more than 4 months shall elapse btween two meetings.NLDIMSR*

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Corporate GovernancePowers of Audit Committee: These powers include:1. to investigate any activity within its terms of reference2. to seek information from any employee3. to obtain outside legal or other professional advice.4. to secure attendance of outsiders with relevant expertise if it is considered necessary.Role of Audit Committee:Oversight of companys financial reporting process and the disclosure of its financial information to ensure that financial statement is correct, sufficient and credible.

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Corporate GovernanceRole of audit Committee contd:Recommendation for appointment, remuneration and terms of appointment of auditors.Approval of payment to statutory auditors for any other services rendered by the statutory auditors.Reviewing with the management annual financial statements and auditors report thereon before submitting to Board for approval, particularly with reference to i. Matters to be included in directors responsibility statementii. Changes if any, in accounting policies and practices and reasons

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Corporate Governance:3. Major accounting entries based on the exercise of judgment by the management.4. Significant adjustments made in the financial statements Arising out of audit findings.5. Qualifications in draft audit report . Reviewing with management, quarterly financial statement before submitting to Board.Reviewing with management, statement of uses / applications of funds raised through an issue.Review and monitor the auditors independence and performance and effectiveness of audit process.NLDIMSR*

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Corporate GovernanceApproval of any subsequent modification of transactions of the company with related parties.Scrutiny of inter-corporate loans and investmentsValuation of undertakings or assets of the company , wherever necessary.Evaluation of internal financial controls and risk management systems.Reviewing with management, performance of statutory and Internal auditors , adequacy of the internal control systems. Reviewing with management adequacy of internal audit function, including structure of internal audit department, staffing , reporting structure coverage and adequacy of control.NLDIMSR*

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Corporate GovernanceDiscussion with internal auditors of any significant findings and follow up.Reviewing the findings with of any internal investigations by internal auditors into matters where there is suspected fraud or irregularity of internal or failure of internal control systems of a material nature and reporting the matter to the Board.To look into reasons for substantial defaults in the payments to depositors, debenture holders, shareholders ( in case of declared dividends) and creditors.NLDIMSR*

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Corporate GovernanceTo review the functioning of whistle blower mechanismApproval of appointment of CFO ,after assessing qualifications, experience and background.Carrying out any other function as is mentioned in terms of reference of Audit Committee.Review of information mandatorily to be done by Audit Committee:Management Analysis and discussion of financial condition and results of operationsStatement of significant related party transactions submitted by management

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Corporate GovernanceManagement letters/ letters of internal control weaknesses issued by the statutory auditors.Internal audit reports relating to internal control weaknessesAppointment, removal and terms of remuneration of the Chief Internal auditor shall be subject to review by the Audit Committee.NLDIMSR*

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Corporate GovernanceIV. Nomination and Remuneration Committee:A. The company shall set up a nomination and remuneration committee which shall comprise of at least three directors, all of whom should be non executive and at least half shall be independent. Chairman shall be an independent director.B. Role of the Committee:1. Formulation of criteria for determining qualifications, positive attitudes and independence of directors and recommending to the Board the policy relating to the remuneration of the directors, key managerial personnel and other employees.NLDIMSR*

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Corporate Governance2. Formulation of criteria for evaluation of independent directors and the Board.3.Devising a policy on Board diversity.4.Indentifying persons who are qualified to become directors and who may be appointed in senior management in accordance with criteria laid down and recommend to the Board their appointment and removal. The company shall disclose the remuneration policy and evaluation citeria in Annual Report.C. Chairman of nomination committee to remain present at Annual General Meeting.NLDIMSR*

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Corporate GovernanceSubsidiary Companies:At least one independent director on the Board of holding company shall be director on the Board of Directors of a material non listed Indian company.The Audit committee of listed holding company shall also review the financial statements in particular, the investments made by the unlisted subsidiary company.Minutes of Board meetings of unlisted subsidiary company shall be placed at Board meetings of listed holding company.The company shall formulate a policy for determining material subsidiary and such policy to be disclosed to stock exchanges and in The Annual Report.NLDIMSR*

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Corporate GovernanceThe term material non listed subsidiary shall mean an unlisted subsidiary , incorporated in India, whose income or net worth exceeds 20% of the consolidated income or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year.No company shall dispose off shares in its material subsidiary which would reduce its shareholding to less than 50% or cease the exercise of control over the subsidiary without passing a special resolution in its general meeting.Selling, disposing and leasing of assets amounting to more than twenty percent of the assets of the material subsidiaries by way of pecial resolution.NLDIMSR*

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Corporate GovernanceVI Risk Management:A. The company shall lay down procedures to inform Board members about the risk assessment and minimization procedures.B. The Board shall be responsible for framing, implementing and monitoring risk management plan for the company.C. The company shall also constitute a Risk Management Committee. The Board shall define the roles and responsibilities of the Risk Management Committee and may delegate monitoring and reviewing of risk management plan to the committee and such other functions as it may deem fit. NLDIMSR*

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Corporate GovernanceVII . Related Party Transactions:A. Related party transaction is a transfer of resources, services or obligations between a company and a related party, regardless of whether a price is charged.B. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party, directly or indirectly in making financial /or operating decisions .An entity is is related if following conditions apply:A) if entity and co are members of same group ( parent/ subsidiary or fellow subsidiary) NLDIMSR*

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Corporate GovernanceB) if entity is associate or joint venture of the other partyC) Both entities are joint ventures of same third partyThe co has to formulate a policy on materiality of related party transactions and also on dealing with related party transactions.Transactions with related party are material if transaction, individually or with transactions entered during the year together, exceed five percent of the annual turn over or twenty percent of net worth of the co as per audited b/s which ever is higher.

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Corporate GovernanceAll material party transactions shall require approval of the Audit Committee.All related party transactions shall require approval of shareholders through special resolution and the related parties shall abstain from voting on such resolutions.VIII: Disclosures :A. Related party transactionsB. Disclosure of Accounting Treatment C. Remuneration of DirectorsD. Management Discussion & Analysis

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Corporate GovernanceCommunication to ShareholdersDisclosure of Resignation of DirectorsDisclosure of formal letter of appointment to independent directorsDisclosure in Annual report about training to independent directors /evaluation of directorsDisclosure on utilization of proceeds from public issues etc.IX. CEO/CFO Certification.X . Report on Corporate GovernanceXI. Compliance : certificate/ quarterly report to Stock exchange authorities.

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Corporate GovernanceInformation to be placed before Board of Directors ( As per Annexure 1A of Clause 49):1. Annual operating plans and budgets of any updates.2.Capital budgets and updates.3.Quarterly results for company and its operating divisions or business segments. 4. Minutes of meetings of all audit committees and other committees of Board.NLDIMSR*

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Corporate Governance5. Information on recruitment and remuneration of senior officers just below the board level, including appointment and removal of CFO and co. secretary.6. Show cause, demand, prosecution and penalty notices which are materially important. 7. Fatal or serious accidents, dangerous occurencies , any material affluent or pollution problems.NLDIMSR*

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Corporate Governance8. Any material default in financial obligations to and by the company or substantial non payment for goods sold by the company.9. Any issue which involves any public or product liability claims of substantial nature including any order or judgement passing strictures on the conduct of the company .10. Details of any joint ventue or collaboration agreement.NLDIMSR*

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Corporate Governance11. Transactions that may involve substantial payment towards goodwill, brand equity or intelletual property.12. Significant labour problems and proposed solution including wage settlement, implementation of VRS scheme if any.13. Sale of investments, subsidiaries, assets which is not in normal course of business.NLDIMSR*

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Corporate Governance14. Quarterly details of foreign exchange exposure and steps taken by the management to limit the risk of adverse exchange risk.15. Non compliance of any regulatory , statutory or even listing requirements and shareholder services such as payment of dividends or delay in transfer of shares etc.NLDIMSR*

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Corporate GovernanceInstitutional Activism : CII , jointly with Institutional Investors Advisory Services (IIAS) conducted survey on Institutional Investors perception of corporate Governance in India Companies : Their findings are as under :How important is corporate Governance in overall assessment of a target companies : 84.2% Very important15.8% Some what imporatant.NLDIMSR*

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Corporate GovernanceWhat is most important parameter evaluated before investing ? ( On a rating scale of 4 being highest )Quality of Financial Reporting : 3.84Reputation of promoter : 3.74Reputation of Management : 3.58Reputation of Board of Directors : 3.16NLDIMSR*

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Corporate GovernanceHow do you percieve companies with good corporate Governance in terms of shareholder returns? 94.7 % associated good corporate governance with high shareholder returns 5.3% with low returns.Have you invested in any co. purely because they have high standards of corporate Governance ? Only 26.3% have invested purely on good corporate governance as basis of investment73.7% on the basis of other variablesCorporate Governance is necessary but not sufficient condition for investment

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Corporate GovernanceClassification of BSE 500 on the BASIS OF Ownership structure :Promoter controlled : 72%PSUs : 13 %MNCs : 9%Professional Cos : 6%Level of corporate Governance rating 4 being highest : MNcs : 3.67Professonal cos : 3.17PSUs : 1.75 Promoters Controlled: 1.35 NLDIMSR*

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Corporate GovernancePerceived shareholder returns acros distinct set of companies: Rating with 4 being highest:Professional companies : 3.73MNCs : 3.09Promoter conrolled : 2.27PSUs : 1.36Likely hood of investing Rating with 4 being highest Professional Cos : 3.92MNCs : 3.45Promoter controlled: 2.78 PSUs : 2.33 NLDIMSR*

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Corporate GovernanceBest Companies : : Rating with 8 BEING HIGHESTTata Group : 7HDFC : 5Infosys : 5HUL : 3Nestle : 3L & T : 3NLDIMSR*

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Corporate GovernanceVoting on shareholder resolutions :Are you ready to invest in non voting shares of companies? Yes : 72.2%No.27.8%Do you have an internal team in your co to help finalise the voting decision?Yes : 60 %No : 40%NLDIMSR*

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Corporate GovernanceFor what percentage of your portfolio companies do you exercise voting rights?:60% would exercise voting rights for more than 75% of their portfolio cos.33.3% exercise voting rights for 50% of their portfolio companies.Most critical corporate actions : Rating with highest being 3:Related party transaction : 2.79M&As 2.71Dilution of Equity 2.64 Change in Business : 2.57NLDIMSR*

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Corporate Governance Most frequently opposed corporate actions as being percieved to destroy shareholder value: Intra group mergers : 80%Intra group Loans : 60%Issue of preferential warrants : 40%Board appointments : 20%Executive pay : 10%Entering new business : 10%

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Corporate GOVERNANCEEngagement with Investee compnaies :Engagement once a month or on quarterly basis for significant investments:For companies where investment were above a self reported minimum threshold : 25 % of the investors met senior management of investee co every month,While 44% of the investos met senior management of investee co every quarter.Engagement qquarterly or half yearly basis for smaller investment: 13% monthly, 33% quarterly and 47% every six months.NLDIMSR*

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CORPORATE govenanceHow do you respond to a companys proposal that you disagree with ? : 64% of the investors try to engage with the company and reach a consensus29% of investors responded that they exit the co.What is the maximum time frame within which you expect companies to address corporate governance concerns?Institutional investors have low tolerance for bad corporate governance.NLDIMSR*

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Corporate GovernanceWhat has been your experience when you attempted to drive corporate governance in investee companies :Excellent success rate : 10%Company responded positively : 70%Not responded positively : 20%Clause 49 and the effectiveness of Corporate governance mechanism :83% of respondents indicated that clause 49 is serving its limited purpose.62 % of respondents stated that existing framework of regulation in India is in effective for enforcing rights and obtaining remedies for corporate governance key issues like sale of business , intragroup mergers, issue of preferentaial warrants etc which are not addressed by the regulations.NLDIMSR*

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Corporate GovernanceTo summarise, investors percieve companies with good corporate governance as generating high shareholder returns, although corporate governance may only be necessary but not sufficient for generating high shareholder returns.Investors are amenable to trading off slightly lower corporate governance levels for slightly better shareholder returns, if they believe their investee compnay is capable of doing so.However, institutional shareholders have low tolerance for bad corporate governance, and often stand ready to leave the company when it commits an act of bad corporategvernance.

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Corporate GovernanceThose investors who are ready to stay in the investment prefer to drive better corporate governance in investee companies , report positive response from their investees. The most contentious issues reported by institutional investors are intra group mergers and related party transactions.Clause 49 only tries to institute a system of checks and balances in a company but does not address the most contentious issues faced by investors. Hence, corporate governance in India will improve only if it is enforced legally.

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Corporate GovernanceSelf Regulation :

Code of Conduct at Tata Group of companies :Please read the mail forwarded.NLDIMSR*

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Corporate Governance : Role of DirectorsNLDIMSR*Establish Vision, Mission and Values : Determine the companys Vision and Mission to guide and set the pace for its current operations and future development.Determine the values to be promoted throughout the company.Determine and review company goals.Determine company policies.

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Corporate Governance : Role of DirectorsNLDIMSR*Set strategy and Structure : Review and evaluate present and future opportunities, threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company.Determine strategic options, select those to be pursued and decide means to implement and support them.Determine the business strategies and plans that underpin the corporate strategy.Ensure that companys organizational structure and capability are appropriate for implementing chosen strategies.

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NLDIMSR*Corporate Governance: Role of DirectorsDelegate to the Management:Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans. Determine monitoring criteria to be used by the board. Ensure that the internal control are effective. Communicate with senior management

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NLDIMSR*Corporate Governance: Role of DirectorsExercise accountability to shareholders and be responsible to relevant stakeholders:Ensure that communications both to and from shareholders and relevant stakeholders are effective.Understand and take into account the interest of shareholders and relevant stakeholders.Monitor relations with shareholders and relevant stakeholders by gathering appropriate information and evaluation thereof.Promote goodwill and support of shareholders and relevant stakeholders.

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NLDIMSR*Corporate Governance: Role of DirectorsResponsibilities:Exercise power in proper way: In furtherance of the reason for which they were given those powers.Act in Good Faith: Act in a way which they honestly believe to be in best interest of the company. In the event of conflict, interest of the company shall prevail. Act with due skill and care.Consider the interest of the employees of the company

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NLDIMSR*Corporate Governance: Role of DirectorsFour most common mistakes made:Failure to document reasons for decisions.Failing to qualify the experts upon which the director relies: To ensure reasonable reliance, directors must have a basis for believing that matters treated by experts are within his or her professional or expert competence.Failing to take the time for preparation and reflection that someone less sophisticated would take. Speed may be carelessness and not efficiency.Buying into the fallacy that if board cant do every thing, it should not do anything

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NLDIMSR*Corporate Governance: Role of DirectorsHow to minimize risk of bad decisions resulting in breach of duty to take care?Document the analysis that goes into decisions and the recommendations to the board.Maintain records which show that the board was familiar with the experience of its experts prior to their retention and select and retain experts in a manner which will preclude receiving advice tainted by conflict of interest. Take enough time to analyze data before making decisions.Consider cost effective alternatives to obtain additional insight and liability protection when facing an important decision.

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NLDIMSR*Corporate Governance: Scandals and Directors ResponsibilityAre directors responsible for scandals?US experience:World Com Inc. : Bernard Ebbers CEO has just been sentenced for 25 years in prison for orchestrating the record $11 billion accounting fraud. At the trial he denied any knowledge of massive book cooking at world com.

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NLDIMSR*Corporate Governance: Scandals and Directors ResponsibilityJohn Rigas founder of cable giant Adelphia got 15 years in prison for looting his company and his son Timothy the formers chief financial officer, got 20 years in prison.L. Dennes Kozlowski the former Tyco Chief and his own former finance chief will serve at least 8 1/3 years and perhaps as many as 25 years after they were convicted of stealing $600 million from Tyco. Former Cendant Corp. Vice Chairman E. Kirk Shelton was slapped with 10 years in prison for his role in accounting scandal that cost the investors and the company more than $3 Billion.

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NLDIMSR*Corporate Governance: Scandals and Directors ResponsibilityThe judges when they see the real victims and see that there is really strong fraud in these companies, they are going to make somebody pay the price and some paid literally:A New York judge signed off settlement deals that forced investment banks, auditor Arthur Anderson and former world com officials to cough up $6.1 billion, much of which will be divided between 8,30,000 investors and institutions who lost money in the accounting fraud. That settlement includes $25 million paid by former World Com board members out of their own pockets, and forfeiture of homes owned by Ebbers and former World Com finance chief Scott Sullivan.And Investment Banks and former directors agreed to pay $7 Billion in a similar settlement over Enron collapse, including $13 million paid personally by 10 former board members. Source: http://accounting.smartpros.com

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NLDIMSR*Corporate GovernanceIssues in Corporate Governance:How independent does the board of Directors need to be to enforce accountability?To whom should the management be accountable?Who should be on the Board?How should investors go about enforcing accountability?

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NLDIMSR*Corporate GovernanceIssues in Corporate Governance:Who will watch the watchers?How should a company align the interest of all of its employees with that of the company?Are we relying too much upon rules to encourage good governance?What does it mean to govern when target is moving one?

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Corporate GovernanceNLDIMSR*Problems in Corporate Governance:Vanishing Companies: Between 1991 and 1996, out of 3900 companies which offered IPO, 2500 have vanishedThere are over 1.36 lakhs companies which are defaulting in complying with requirements of Company LawThere are about 2481 sick companiesThere is significant no of companies which have not paid any dividends since 1996

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Corporate GovernanceNLDIMSR*Reasons for Poor Corporate Governance in India: Feudal mid set that exists in IndiaManifold restrictions set by GovernmentLack of concern for societySense of insecurity that prevails amongst the very people who are supposed to inspire a sense of confidence about the company among the stake holder populationGreed and Ego

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NLDIMSR*Corporate Governance: ENRON CaseAuditors and Analysts who are external to the company and the Board of Directors who are internal to the company have failed in discharging their duties.Five issues have been identified:Chairman & CEOAudit CommitteeIndependence and Conflict of InterestFlow of InformationToo many directorships

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NLDIMSR*Corporate Governance: ENRON CaseChairman and CEO:In Enron, Kenneth Lay was both Chairman & CEO. For a brief while the two positions were separated when Jeff Skilling functioned as CEO and when he resigned in August 2001, Lay again took both roles. Mr. Lay claimed that he did not know too much of details of accounting fabrication that was going on. For Lay and former CEO Jeffrey Skilling and former top accountant Richard Causey consequences of conviction are dire.

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NLDIMSR*Corporate Governance: ENRON CaseIndependence and Conflict of Interests:Good governance requires that outside directors maintain their independence and do not take any benefit from their board membership except remuneration. Otherwise it can create conflicts of interests. Enron had majority of directors who were independent but they compromised their independence. Six of 14 outside directors suffered conflict of interests.

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NLDIMSR*Corporate Governance: ENRON CaseConflict of Interest: Herbert S Winokur, is also Director of the Natco group which is a supplier to Enron and its subsidiaries. He is also the Chairman of the Boards Finance Committee which recommended that the Board suspend the companys ethics code. The involvement of these directors receiving other benefits compromised their independence making one wonder whether they acted in the best interest of Enron.

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NLDIMSR*Corporate Governance: ENRON CaseConflict of Interest:John Mendelsohn was the President of MD Cancer centre at the university of Texas. Enron and related entities donated $1.5mn (Rs. 7.2 Crores) to the centre since 1985.William Powers, who also headed special investigation team, was the Dean of Texas law school. Enron had given $3 million (Rs. 14.4 crores) to the university since he became Dean. The law firm that works for Enron, Vinson & Elkins, has endowed a chair at the law school.

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NLDIMSR*Corporate Governance: ENRON CaseConflict of Interest:Robert Belfer, Chairman of Belfer Management bought a stake in energy company from an Enron partnership thereby providing funds to start another. Wendy Gramm (spouse of Republican Senator) was formerly the Chairman of commodities Futures Trading Commission of the Federal Govt. Enrons trading in energy derivatives was exempt from regulation of CFTC. Shortly after that decision, she quit the commission and joined the Enrons Board. He is presently Director of Regulatory Studies Programme at George Mason University. Enron donated $50,000 (Rs 24 Lacs) to that centre.

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NLDIMSR*Corporate Governance: ENRON CaseConflict of Interests:Lord John Wakeham, a former Minister for Energy in U.K. was paid $7200 (Rs. 34.5 lakh for services as a consultant to Enrons European Unit. When he was minister, he gave consent for building the countrys largest power plant at Teeside.

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NLDIMSR*Corporate Governance: ENRON CaseToo many Directorship:Being a Director, needs time and efforts. Although a Board might meet only four or five times a year, the director needs to have time to read and reflect overall material provided to and make informed decisions. Good governance suggests that an individual sitting on too many boards will not have time to do a good job. Raymond Troubh, one of the director holds directorship of 11 companies.

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NLDIMSR*Corporate Governance: ENRON CaseAudit Committee: The Board works through sub committees and audit committee is one of them. It not only oversees the work of the auditors but is also expected to independently inquire into the workings of the organization and bring lapses to the attention of full board. The Enron audit committee failed in this regard. Prof. Robert Jaedicke, a former accounting professor and Dean of Stanford University Business School, was Chairman of Audit Committee. Jaedicke, in addition to not performing his role as Chairman of Audit Committee, seconded the motion in the board to suspend the code of ethics of the company in order to allow an employee to set up special partnership. Setting up that entity amounted to a conflict of interest and was specifically prohibited by the company code. Apart from Jaedicke, the Audit Committee comprised of five persons three of whom resided outside the country. An Audit Committee is almost a working committee and needs to meet more frequently than a full board. Having non-residents on the committee hampered its functioning. One of the members, Ronnie Chan missed 75% of the meetings in 2001.

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NLDIMSR*Corporate Governance: ENRON CaseFlow of Information: Board is expected to take informed decisions for which it needs important information in a timely manner. In case of Enron directors are pleading ignorance of the murky deals as way of excusing themselves of the liability.The special investigation committee report says:The Board was denied important information that might have led it to action, but the Board also did not fully appreciate the significance of some of the specific information that came before it. If they did not have sufficient information, they should have gone seeking for it.Report suggests that Enron operated about 3500 special purpose Entities, that is, partnership that shifted debt and losses of Enrons balance sheet.If the directors did not understand what was being reported to them, it was their job to educate themselves more about it by asking the right questions and getting more information. This, they failed to do.

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Comparative study :USA, UK, Germany and JapanNLDIMSR*Corporate Governance

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Corporate Governance Comparative study :

Ownership Control RightsGovernance RulesMarket for corporate Control

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Corporate GovernanceNLDIMSR*1. Ownership : USA : More than 50% of equity shareholding with Institutional investors ie, pension funds, insurance funds, banks trusts etc.About 30% of shareholding with private shareholders including founders.Liquid market for holdings and rights of trading stocks in the market retained.

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Corporate GovernanceNLDIMSR*UK : 67 % of equity shareholding with institutional shareholders including insurance cos, pension funds, unit trusts etc.About 20% of shareholding with private shareholders.Retention of liquid market and right of trading of stocks freely in the market

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Corporate GovernanceNLDIMSR*Germany : 40 % of equity holding by large companies, followed by Institutional holding 11%Banks 10%Private Shareholders 11%Balance by Govt and othersSmaller companies : Family ownedSubstantial cross holding amongst companiesNo role / limited role of private investorsIlliquid holdingsStrong control of com. Banks via proxy voting on behalf of individual shareholders.

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Corporate GovernanceNLDIMSR*Japan : Corporate cross shareholding by affiliated companies and major banks 60 to 80 % shareholding with institutional shareholders Insurance cos, trusts and pension funds20 to 30 % shareholding with private shareholdersShareholders unwilling to trade for short term gains.

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Corporate GovernanceNLDIMSR*2. Control Rights : USA :Management and control operations of corporations delegated to professional managersUK: Management and control of operations delegated to professional managers under governance and supervision of the Board.

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Corporate GovernanceNLDIMSR*Control Rights cotd:Germany : Management and control of operations delegated to Management Board ( Vorstand) under supervision and governance of Supervisory Board ( Aufsichtsrat)Japan : Control rights by President and operating committee of top management although decision making as per bottom up consensus method

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Corporate GovernanceNLDIMSR*3.Governance Rules :USA :Board members including CEO appointed by shareholdersAudit committee with independent Directorship set up compulsory as precondition for listingCompanies to ensure 50 % outstanding shares voting at AGMProxy voting by mail permitted Proportional representation for minority shareholders interestPreemptive right to issue new shares to retain proportional holdings.

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Corporate GovernanceNLDIMSR*Governance Rules : Contd:UK: Board members appointed by shareholders Audit committee of at least 3 non executive directors compulsory as listing requirementNo requirement of quorum on AGM

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Corporate GovernanceNLDIMSR*Governance Rules : Contd.Germany : Two tier Board system : Supervisory Board : (Aufsichtsrat ) : Discharging all supervisory functions with equal shareholders as well as employee / union representatives.Management Board : (Vorstand ) : With Senior Executives directing the functions of Direction and Management. Considerable autonomy to Management Board.Effectiveness and functioning of Management Board monitored by supervisory Board.

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Corporate GovernanceNLDIMSR*Governance Rules contd :JAPAN : Single tier majority of all inside directors Board with employee directors.Powerful Govt intervention by Ministry of Finance for industrial acticvity and capital flows.Statutory auditors ( Kausayaku ) appointed by shareholdersAppointment of 3-members audit committee.

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Corporate GovernanceNLDIMSR*4. Market for corporate control:USA : Very strong capital markets Role of Banks in governance not importantManagement take take overs including hostile take over are common.

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Corporate GovernanceNLDIMSR*Market for corporate control Contd:UK : Active and strong capital marketM&As : Quite strong, active and commonUK Banks not interested to take equity stakes hence insignificant role in corporate governance.

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Corporate GovernanceNLDIMSR*Market for Corporate Control :Germany : No market control for corporates by stock exchange.Direct holding of shares by individuals discouraged due to tax on dividendsIncreased M&A activity due to German unification.

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Corporate GovernanceNLDIMSR*Market for Corporate Control contdJapan : No market for corporate controlFriendly M&As not uncommon. Minimal hostile takeover activity.

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Corporate Social ResponsibilityNLDIMSR*

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Corporate Social ResponsibilityWhat is corporate social responsibility?Pet projects of CEO ? Medical camp / distribution of woolen rugs during winter season or plastic sheets/ umbrellas during monsoon ?Is it corporate philanthropy aimed at propaganda activity?The modern corporate leaders look at corporate social responsibility as creative opportunity to fundamentally strengthen their businesses while contributing to society at the same time Business partnering with society.

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Corporate GovernanceRequirement of CSR in Companies Act 2013Sec.135 : Corporate Social Responsibility :Corporate Social Responsibility Committee:Every company with net worth of Rs. 500 crores or more Or Turnover of Rs. 1,000/- crore Or a Net Profit of Rs. Five crore or more during any financial yearShall constitute a Corporate Social Responsibility Committee of Board consisting of three or more directors , out of which at least one director shall be independent.Board of Directors report to members at AGM to disclose constitution of Corporate Social Responsibility Committee

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Corporate GovernanceCorporate Social Responsibility Committee:The committee shall formulate and recommend to the Board Corporate Social responsibility Policy and Indicate the activities to be undertaken by the company as specified in Schedule VII .Recommend the amount of expenditure to be undertakenMonitor the Corporate Social Responsibility Policy of the Company.Board to report the activities in its Report as well as place it on the web site of the company.

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Corporate GovernanceBoard to ensure that the CSR activities are undertaken.Board to ensure that company spends in every financial yearAt least two percent of the average net profits of the company made during the three preceding financial year , in pursuance of CSR policy of the company.For taking up CSR activities, company shall give preference to local area around it where it operates.If Board fails to spend this amount, the Board should specify the reasons why it could not send in its financial report to the members of the company.

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Corporate GovernanceSchedule VII :Activities which may be included by companies in their corporate social responsibility policies: i. eradicating extreme hunger and poverty.ii. Promotion of education.iii. Promoting gender equality and empowering women.iv. Reducing child mortality and improving maternal healthv. combating human immununo deficiency virus, acquired immune deficiency syndrome, malaria and other diseases vi. Ensuring environmental sustainability.

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Corporate GovernanceSchedule vii :vii. Employment enhancing vocational skills.viii. Social business projects.ix. Contribution to Prime Ministers National Relief Fund or any other fund set up by central/ state govt for socio economic development and relief and welfare of scheduled castes, scheduled tribes, backward classes, minorities and women.x. Such other matters as may be prescribed.

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Corporate Social ResponsibilityBefore looking into academic aspects of CSR, let us look at practical examples of companies engaged in CSR:Lupin - Winner of CSR award in 2003 :Co has set up Lupin Human Welfare and Research Foundation (LHWRF) an NGO .LHWRF has set up 125 schools either singly or with Govt help, provided for drinking water facilities in 80 villages and helped 25,000 people cross the poverty line.NGO is headed by Sita Ram Gupta Ex Asst Eng of RSEB.

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Corporate Social ResponsibilityGuptas model is simple. He first creates a local body at village level., typically 11 to 21 members depending on population of village. The village chooses the members of the local body but it must compulsorily have women as well as representation of scheduled caste and scheduled tribe.This local body figures out what is the priority there and LHWRF delivers it.NLDIMSR*

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Corporate Social ResponsibilityExample of Lakshman Singh aged 58 years bee farmer :He was a poor bee farmer earning a few thousand rupees from bee farming.He attended a seven day programme organised by Lupin on bee farming.Gupta helped him in getting Rs.10000/- loan from local bank to buy five honey combed bee boxes.Singhs income kept growing- presently earning Rs.10 lakhs a year ( in 2003) and his customers included Dabur. There are many like singh whomake 4-5 lakhs from bee farming.

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Corporate Social ResponsibilityThere are countless others whose wives have not died during child birth as Lupin built a road connecting village to a hospital and numerous children who have gone to school.NLDIMSR*

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Corporate Social ResponsibilityWinner No.2 : Canara Bank : Lending a helping hand :In 1960, way before nationalisation, Canara bank provided educational loans at cheaper rates.About 47000 employees of Canara Bank donate Rs.3 /-per month to a social cause of their choice Rs.16.9 lakh annually.Apart from this, Bank contributes Rs. 10 crores, nearly 1% of its profits.Like Lupin, Canara bank CSR projects fall mostly within the ambit of community development. Its main thrust is on giving vocational skills to unemployed people.NLDIMSR*

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Corporate Social ResponsibilitySince 1988, Cananra Bank has trained 1.3 lakh people.One big initiative is Rural Entrepreneurship Development Institutes and set up 20 such vocational centres across India in partnership with Syndicate Bank and Dharmastala Manjunatheshwara Educational Trust. Example of Ramakrishna who came out from such centre runs a shop at Bidadi near Jogaradoddi and makes Rs. 10000/- month selling wooden carvings.NLDIMSR*

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Corporate Social ResponsibilityWinner No.3 : Gujarat Ambuja Cement s: No charity pleaseAmbuja Cement Foundation : a non profit organisation set up by Gujarat Ambuja Cement in 1993 and now extends across seven states, touching the lives of 4.5 lakhs people in nearly 300 villages.ACF does not associate with corporate philanthropy. Every project it undertakes involves some contribution by stakeholders . ACF projects are simple and need based. So, water harvesting gains priority in Saurashtra.NLDIMSR*

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Corporate Social ResponsibilityIn Bhuj ( Kutch District) : It did not adopt any village during earthquake for rehabilitation . Instead, it set up masonry camps so that locals could build houses and have career options.ACF also cleared 12 wells near the coast of saline water.ACF encouraged a mentally challenged girl Hunny Saini to play badminton. She won a gold medal at Dublin Spectal Olympics.NLDIMSR*

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Corporate Social ResponsibilityOther CSR Practices : ITC : CSR as business model :ITCs Commitment Beyond the Market initiative is mutually beneficial model where social development is integrated with its businesses including cigarettes, paper and paper boards, food products and hotels.While its farm and social forestry projects aim at increasing forest cover and ecological balance, for ITC, it creates a source of timber .Its watershed development projects improve soil content in dry land, it gives ITC a bigger sourcing area for agricultural inputs. NLDIMSR*

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Corporate Social Responsibilitye Choupal : By providing on line market related information , ITC not only empowers farmers, but also gains from more reliable and better quality inputs.The company has written CSR policy and it has identified special people to head respective projects.The Board reviews he projects once a year and corporate management committee headed by CEO Deveshwar reviews twice a year.In the year 2003-04 , it spent Rs.17.94 crores on various projects, including on women empowerment and education. NLDIMSR*

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Corporate Social ResponsibilityWipro : Moulding a gneration :The Applying Thought in Schools project aims to enhance the quality of learning of school going children by providing six months training programme for teachers and school principals.The focus is on encouraging independent and creative thinking building problem solving skills and helping children become what they want.Wipro started the project closer home I five schools in Bangalore and then taken it to 80 schools across 10 states and trained 1800 teachers at a cost of 1.44 crore.

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Corporate Social ResponsibilityWinners of CSR awards in 2006:Winner : SAIL : It has specific CSR policy Spends 2% of distributable surplus on projects including education, water, roads and connectivity, Health care issues.Ist Runner up : Neyvelli Lignite Corporation : Major focus re employability of project affected persons. It also looks at income generation of destitute, women and people affected with disability.2nd Runner up : TCL : Works through trusts and societies that take up development work in the areas of natural resource management livelihood development , health care and education.NLDIMSR*

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Corporate Social Responsibility Awards for the year 2009 :Winner : Tata SteelNLDIMSR*

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Corporate Social ResponsibilitySurvey state of CSR in India :Why do corporates take up CSR aciviies ?Philanthropy 50% Image building 42%Employee morale 30%Ethics 30%NLDIMSR*

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Corporate Social ResponsibilityWhat are the major CSR activities ? Healthcare 17%Blood donation 16%Education 12%Opening schools 10%Relief Camps 10%NLDIMSR*

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Corporate Social ResponsibilityTarget Groups:Weaker sections of society 43 %Company employees 37%Children 34%Rural community 29%Disaster affected 27%Community near workplace 23%Ailing / sick people 20%

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Corporate Scial ResponsibilityHow do corporates implement CSR activities?Donating money 81%Staff deputation 24%Staff volunteering 20%Company products 19%Enabling employment 17%Company facilities 25% NLDIMSR*

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Corporate Social ResponsibilityWhy some coporates do not take up CSR activities ?Absence of policyLack of timeDifficulty of tracking and monitoringNo performance bench marksLack of continuity in action

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Corporate Social ResponsibilityReasons for not having corporate policy on CSR :Never thought of it 44%Already contributing 39%No specific reason 39%Small size 24%Decision with upper mgt 21%Financial reasons 21%Doing business honestly 15% NLDIMSR*

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Corporate Social ResponsibilityMcKinsey Survey on Global CEOs about CSR :Do you believe that society has higher expectations for business to take public responsibilities than it had 5 years agoResponse of CEOs who said yes (in % )By Region :Europe : 96America : 95Rest of the world :98By type of co :Public : 97 Private 91 NLDIMSR*

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Corporate Social ResponsibilityWhich of the following stake holder groups have/ will have the greatest impact on the way your company manages societal expectations? : Now In the next 5 yearsEmployees 48 39Customers 44 50Governments 30 32Local Communities 27 29Regulators / Govt agencies 26 25Media/ opinion leaders 22 24NGOs 20 27 NLDIMSR*

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Corporate Social ResponsibilityStake holders impacting business : Now In next 5 yearsBoards 19 16Investment community 16 19Organised labour 7 7Suppliers 6 5 NLDIMSR*

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Corporate Social ResponsibilityTrends influencing societys expectations of business :Which of the following trends do you think are most important of business?Increasing Environmental Concern : 61Demand Supply gap of natural resources 38 Emergence of China / India on global market place : 37Increasing Technological connectivity 33Decreasing Trust in Business 18 Growing influence of NGOs 14 NLDIMSR*

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Corporate Social ResponsibilityTrends influencing societys expectations: Contd

Backlash against Globalisation 12Over burdened Public Sector 12Off shoring 12Protectionism 06

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NLDIMSR

Corporate Social ResponsibilityWhich of the following global environmental, social and political issues are the most critical to address for the future success of the business ?Educational systems and talent constraints : 50%Poor public governance ( weak states, Conflict zones, corruption) : 44%Climate Change : 38%Making globalizations benefits available : 36% to poor ( Bottom of pyramid product devl, marketing and distribution) NLDIMSR*

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Corporate Social Responsibility

Security of energy supply : 35Access to clean water, sanitation : 12HIV/ AIDS and other public health issues 08

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Corporate Social ResponsibilityBarriers to CEO engagement :Which of the following barriers do you believe keep you, as a CEO , from implementing and integrated and strategic company :Competing strategic priorities : 43Complications of implementing strategy across various business functions : 39Lack of recognition from Fin. Markets : 25Differing definitions of CSR across regions / cultures : 22Failure to recognize link to value drivers : 18 NLDIMSR*

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Corporate Social ResponsibilityDifficulty in engaging with external groups : 17Lack of effective communication infrastructure :13Lack of Board support : 07Employee resistance : 04

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Corporate Social ResponsibilityPerformance Gap :Which of the following activities should your company implement to address environmental, social and governance issues? What co what co PerformanceParticulars should do is doing GapFully embed these issues into strategy and operations 72 50 22Have Board discuss and act 69 45 24Engage in industry collaborations 56 43 13Embed these issues in global SCM 59 27 32

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