corporate governance combined code of practices

7/29/2019 corporate governance combined code of practices

1/36

Poonam Shukla I CGVE

CODE OF CORPORATEPRACTICESIn order to focus on the need and importance of governance incorporate working, the British Government set up a committeecalled Cadbury Committee. It looked into the reasons for the scams

that took place in England. The problem in England became soacute that the committee was constituted to look into directorsaccountability towards the companys shareholders. Deficiencies inthe accounting standards led to failure of many companies. Thisbrought to need, some norms and codes, to remedy the improperaccounting system. Serious concerns were raised regardingcorporate governance and the committee on CG was set in 1991 byLondon stock exchange to look into financial aspects of CG. Thecommittee was led by Sir Adrian Cadbury.


2/36

Cont.. It submitted its report on CG in December 1992. The

recommendations of the committee were with

respect to reporting by the directors regardingfirms financial and non-financial issues, issuesrelated to purchase, statements of recruitment,training and motivation for the human resource,comparison of actual expenses with budgeted

figures, check the correctness of hard numbers likeprofit and loss, assets and liabilities, investmentareas and soft numbers like motivation and energylevel of employees. The non-financial issues

included reporting by directors of the companyssystem of internal control. It extender controlbeyond the financial matters and impacted thecompanys internal auditing system.



3/36

Cont..When the recommendations of Cadbury

Committee report were made public, there waslot of criticism from the corporate world as itaffected autonomy of the board. The Board didnot react positively to the code of practices ofthe report. They realized the problems thatcould arise by their policies of hiring friends andrelatives or buying supplies from specificvendors to promote the vested interests. The

directors lost the prerogative of running thecompanies the way they wanted without anyoutside interference.



4/36

Cont.. This controversy resulted in the formation of Paul Ruth man

Committee.

This committee gave arguments in favour of the directors. Itsaid that measurement on the basis of Soft members likemotivation, training etc. was difficult to analyze and quantifyand could, thus, lead to biased opinion against directors. Itrestricted the reporting requirements to financial control

only and excluded the reporting of internal control system aswas contained in the code of practices of the Cadbury report.However, the scams continued becoming a cause of concernfor the investing public. It took five years to reinstate therecommendations of Cadbury committee report on internalcontrol reporting system despite the protests by the

directors wanted to reveal nothing more than what wasabsolute necessary to the shareholders and general public.

Now to gain public confidence, the task of chairing thecommittee on CG was given to Ron Hampel.



5/36

The committee was entrusted with the task of keeping up themomentum of the recommendations of Cadbury committee report bydeveloping further guidance. The report submitted by the committeeextended directors responsibilities to all relevant control objectivesincluding business risk assessment and minimizing the risk of fraud.

The committee realize ground realities of business rather than onlypossible aspect of business. It went up to the extent of saying that ifdirectors are honest, why should they not disclose it with hard and softnumbers.

It believed that directors cooperation and coordination goes a long wayin affecting reputation of the company. Though directors may be ethicalat the time of their joining, there mindset can change over a period oftime due to personal ambitions. This can lead to dispute b/w personalgoals and corporate goals. The chairperson should step in during suchsituations as he is slightly more equal than directors who are all equalsamongst themselves.



6/36

CODE OF PRACTICE GIVEN BY CADBURY

COMMITTEE

Cadbury committee provided guide lines to promotethe standards of CG of public companies.

The guidelines of the code are as follows:

The CEO and Chairperson of the board of directorsshould be separate as same person havingresponsibilities of both the posts gives too muchauthority to that person with unequal check on hispowers to use his authority.

The CEO is responsible for managing day-to-dayoperations of the company and chairman shouldmanage the affairs of the board. He should beempowered to hire and fire the CEO if it is in theinterest of the company.



7/36

Cont.. The day-to-day activities include planning, organizing and

implementing strategies approved by the board. The CEOsactivities are, thus, governed by the chairman. The chairman

should set the goals of the CEO and monitor his performancein the implementation of organizations strategy.

The organization should have non-executive directors to theadvantage of their experience and expertise. While thesedirectors are not part of the board, they hold senior

executive positions in other companies. They supplementthe efforts of full time executive directors on the board andcheck their working and affect strategic decision at theboard level. The non-executive directors should ensure thatthey are not proved as a mere rubber stamp to enforce board

decisions. Rather, their support should be crucial to boarddecision. Board monitoring committees established to dealwith setting of directors remuneration should consist ofnon-executive directors who would act as independentjudges of management.



8/36

While appointing non-executive directors, twopoints, must be taken care of :

I. The non-executive directors should not be mereyes-men who protect the interest of theiremployers. They should look after the interest ofthe organization rather than interest of theiremployers.

II. Sometimes, chairman of one company appointsthe chairman of another company on the board ofhis company with the understanding that thechairman of the other company would reciprocateand appoint him on the board of his company.Such practice should be avoided as it leads topromotion of personal interest and not corporateinterest.



9/36

COMBINED CODE OF PRACTICE It is derived from Ron Hampel Committees final report and the

Cadbury report.

It introduced stipulations that board of directors should follow tomaintain ethical climate of the company. It resulted in enhancing theconfidence of investors who invested their savings in thesecompanies.

The combined code was added to the listing rules of London StockExchange and its compliance was mandatory for all listed companiesin the UK. The stipulations contained in the combined code are asfollows :

1. There should be a foolproof system of internal control to safeguardthe investment of shareholders and assets of the companysbusiness but that risk should be accepted by the board members.

2. Directors hold a fiduciary relationship with their stakeholders, that is

, a relationship of trust and faith. They should disclose any personalrelationships they have with the suppliers or any of the stakeholders.



10/36

Cont..3. The directors should annually conduct a review of internal

control system of the firm. The review should cover areas of

financial controls, operational controls, compliance controlsand risk management.

4. The review should be disclosed to the shareholders as it isimportant for the company to satisfy its shareholders. Thejudgment of directors with respect to any matter should be

objective and not based on personal bias. Any falsificationof facts will only defame the company in the eyes of public.

5. Most of the shareholders are small investors who investtheir life time savings in companies in order to earn regulardividends and capital gains. It is the duty of directors to

protect investors money by not indulging in insider trading.There should be strict rules against insider trading, overinvoicing and under invoicing to protect the interests ofinvestors.



11/36

CORPORATE GOVERNANCE IN INDIA

BIRLA COMMITTEE REPORTReport of this committee activated the need for CG in Indiaalso.

Amendments were made in the Companies Act, 1956 in2000.

Additional stipulations were made in this listing agreementand an annual award was instituted for excellence in CG.

The first formal attempt to evolve a code of corporategovernance for Indian companies was put forward by theBirla Committee Report (or Kumar Mangalam Report). The

objective of this committee was enhancement of the longterm shareholders value while at the same time protectingthe interests of other stakeholders.

The main recommendations of the report are presentedbelow :



12/36

Cont

1. Board of directors: The boards of directors guide companysoperations control them and provide objective judgment,independent of the management, to the company. The boardremains accountable for all its actions to the shareholders. Thebasic responsibilities of the board include: strategic

development of the company, maintaining good memberrelations, protecting companys assets and fulfilling all legalrequirements.

2. Audit committee: Companies must have an audit committeeresponsible for their financial reporting.

1. This committee shall have access to all financial information, and

power to investigate any activity within its terms of reference, seekinformation from any employee for effective financial reporting.

2. The purpose of appointing audit committee is to present and disclosecorrect, sufficient and credible financial information of the companyto its stakeholders.



13/36

Cont

3. Remuneration committee: The report recommendedsetting up a remuneration committee to determine andaccount for the companys policy on remuneration of itsdirectors. Remuneration also includes pension rights and

compensation payment to them.4. Accounting standards and financial reporting: Thecommittee recommended issuing accounting standards bythe institute of Chartered Accounting of India regardingupgrading of accounting standards and financial reportingsystem in India.

Companies are required to present(i) consolidated accounts for all subsidiaries and(ii) financial reporting for each of their product segments, so that

shareholders have complete financial picture of the companyin one statement only.



14/36

Cont..

5. Management:I. While the board of directors ensures that corporate policies

and strategies are laid according to the code of CG,management of the company ensures that these policies andstrategies are implemented successfully for effective

attainment of corporate objectives.II. The role of management should be clearly defined by the

board of directors.III. Management of the company comprises of its CEO, executive

directors and managers at various organizational levels.IV. The committee recommended that annual report to

shareholders should contain management discussion andanalysis report besides directors report.

V. This report should contain matters like companysopportunities and threats, risk, internal control system,development of HRs etc.



15/36

Cont..6. Shareholders: Shareholders are owners of the company.

I. They have the right to obtain timely information from the

company.II. Right to transfer and register their shares.III. Right to participate and vote in shareholders meetings.IV. Right to elect members of the board etc.V. These rights recommended that shareholders evaluate corporate

governance performance of the company.VI. Shareholders participate in companys general body meetings toensure that the company is functioning for their interests.

VII. In this regard, the committee recommended that companysquarterly results and various financial presentations may be put upon companys web-site for access by share holders.

VIII. The Birla Committee Report laid sound foundation for good CG ofIndian companies.



16/36

SEBI CODE ON CGSEBI had constituted a committee on CG under the

Chairmanship of Shri Kumar Mangalam Birla, Member ,

SEBI Board to promote and raise the standard of CG listedcompanies. The SEBI Board in its meeting held on january25, 2000 considered the recommendation of thecommittee and decided to make the amendments to the

listing agreement in pursuance of the decision of theboard. It is adviced that a new clause, namely clause 49, bein corporated in the listing agreement as under :



17/36

Conta) Board of Directors

1. The company agrees that the board ofdirectors of the company shall have anoptimum combination of executive and non-executive directors with not less than fiftypercent of the board of directors comprising ofnon-executive directors. The number ofindependent directors would depend on

whether the chairman is executive or non-executive, in case of a non-executive chairmanat least one third of board should comprise ofindependent directors and in case of anexecutive chairman, at least half of boardPoonam Shukla I CGVE


18/36

Explanation- Cont For the purpose of this clause the expression

independent directors means directors who apartfrom receiving directors remuneration, do not haveany other material pecuniary relationship ortransactions with the company, its promoters, its

management or its subsidiaries, which in judgmentof the board may affect independence of judgmentof the director.

2.The company agrees that all pecuniary relationshipof transactions of the non-executive directors viz-a-viz the company should be disclosed in theAnnual Report.



19/36

Contb) Audit Committee

1. The company agrees that a qualified andindependent audit committee shall be set up andthat :

i. The audit committee shall have minimum three

members, all being non-executive directors, withthe majority of them being independent, andwith at least one director having financial and

accounting knowledge;ii. The chairman of the committee shall be an

independent director;



20/36

ContIII. The chairman shall be presented at annual general

meeting to answer shareholders queries;

IV. The audit committee should invite such of theexecutives, as it considers appropriate ( andparticularly the head of the finance function) to be

present at the meeting of the committee, but onoccasions it may also meet without the presence ofany executives of the company. The financedirector, head of internal audit and when required,a representative of the external auditor shall bepresent as invites for the meetings of the auditcommittee;



21/36

ContV. The company secretary shall act as the secretary

to the committee;



22/36

Cont2. The audit committee shall meet at least thrice a

year. One meeting shall be held before finalizationof annual accounts and one every six months. Thequorum shall be either two members or one thirdof the members of the audit committee, whichever

is higher and minimum of two independentdirectors.

3. The audit committee shall have powers whichshould include the following:

I. To investigate any activity within its terms ofreference.

II. To seek information from any employee.Poonam Shukla I CGVE


23/36

ContIII. To obtain outside legal or other professional

advice.

IV. To secure attendance of outsiders with relevantexpertise, if it considers necessary.



24/36

Cont4. company agrees that the role of the audit

committee shall include the following:

I. Oversight of the companys financial reportingprocess and the disclosure of its financialinformation to ensure that the financial statement

is correct sufficient and credible.II. Recommending the appointment and removal of

external auditor, fixation of audit fee and also

approval for payment for any other services.III. Reviewing with management the annual financial

statements before submission to the board,focusing primarily on;



25/36

Cont Any changes in accounting policies and practices.

Major accounting entries based on exercise ofjudgment by management.

Qualifications in draft audit report. Significantadjustments arising out of audit.

The going concern assumption.

Compliance with accounting standards.

Compliance with stock exchange and legal

requirements concerning financial statements. Anyrelated party transactions i.e., transactions of thecompany of material nature, with promoters or the

management, their subsidiaries or relatives etc. thatPoonam Shukla I CGVE

C t


26/36

Contiv. Reviewing with the management, external and

internal auditors, the adequacy of internal controlsystems.

v. Reviewing the adequacy of internal auditfunction, including the structure of the internal

audit deptt, staffing and seniority of the officialheading the department, reporting structure,coverage and frequency of internal audit.

vi. Discussing with internal auditors any significantfindings and follow up there on.


C t


27/36

Contvii. Reviewing the findings of any internal

investigations by the internal auditors into matter

where there is suspected fraud or irregularity or afailure of internal control systems of a materialnature and reporting the matter to the board.

viii. Discussing with external ousters before the auditcommences, nature and scope of audit as well ashave post-audit discussion to ascertain any areaof concern.

ix. Reviewing the companys financial and riskmanagement policies.


C t


28/36

Contx. To look into the reasons for substantial defaults

in the payment to the depositors, debenture

holders, shareholders (In case of non-payment ofdeclared dividends) and creditors.

5. If the company has set up an audit committeepursuant to provision of the companies Act, thecompany agrees that the said audit committee

shall have such additional functions/ features asare contained in the listing agreement.


R ti f Di t


29/36

c. Remuneration of Directors1. The company agrees that the remuneration of

non-executive directors shall be decided by boardof directors.

2. The company further agrees that the followingdisclosure on the remuneration of directors shall

be made in the section on the CG of the annualreport.

i. All elements of remuneration package of all the

directors i.e. salary, benefits, bonuses, stockoptions, pension, etc.

ii. Details of fixed component and performance

linked incentives, along with the performancecriteria. Poonam Shukla I CGVE

C t


30/36

Contiii. Service contracts, notice period, severance fees.

iv. Stock option details, if any-and whether issued ata discount as well as the period over whichaccrued and over which exercisable.


d B d P d


31/36

d. Board Procedure1. The company agrees that the board meeting shall

be held at least four times a year, with a maximum

time gap of four months between any twomeetings.

2. The company further agrees that a director shall

not be a member in more than 10 committees oract as chairmen of more than five committeesacross all companies in which he is a director.Furthermore it should be a mandatory annualrequirement for every director to inform thecompany about the committee positions heoccupies in other companies and notify changes as

and when they take place.Poonam Shukla I CGVE

M t


32/36

e. Management

1. The company agrees that as part of the directors

report or as an addition thereto, a managementdiscussion and analysis report should form part ofthe annual report to the shareholders. Thismanagement discussion and analysis should

include discussion on the following matters withinthe limits set by the companys competitiveposition :

i. Industry structure and developments.

ii. Opportunities and threats.

iii. Segment-wise or product-wise performance.Poonam Shukla I CGVE

C t


33/36

Contiv. Outlook.

v. Risks and concerns.

vi. Internal control system and their adequacy.

vii. Discussion on financial performance with respectto operational performance.

viii. Material developments in HRs/IR front, includingnumber of people employed.


C t


34/36

Cont2. Disclosure must be made by the management to

the board relating to all material financial and

commercial transactions, where they have personalinterest, that may have a potential conflict with theinterest of the company at large (e.g. dealing in

company shares, commercial dealings with bodies,which have shareholding of management and theirrelatives, etc.).


f Shareholders


35/36

f. Shareholders1. The company agrees that in case of the

appointment of a new director or reappointment

of a director the shareholders must be providedwith the following information:

i. A brief resume of the director;

ii. Nature of his expertise in specific functional areas ;and

iii. Name of companies in which the person also holds

the directorship and the membership ofcommittees of the board.


Cont


36/36

Cont2. The company further agrees that information like

quarterlyresult, presentation made by companies

to analysts shall be put on companys web-site, orshall be sent in such a form so as to enable thestock exchange on which the company is listed to

put in on its own web-site3. The company further agrees that a board

committee under the chairmanship of a non-executive director shall be formed to specificallylook into the redressing of shareholders andinvestors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared

di id d t thi itt h ll b d i t d

corporate governance combined code of practices

Documents

Transcript of corporate governance combined code of practices