- CA Rama Subbarao K
I. Need for Corporate Governance
“Excellence” is the state everyone
would dream of achieving and we also know that just dreaming is not going to
achieve the excellence. So, there should be proper planning, procedures and
continuous commitment towards it. This applies to an individual and what in
case of big group of people or organization. There should be some rules and
regulations, There should be some controls which can ensure that the activities
are going in line with the objectives of the company. Along with the extensive
development in the corporate field there is a tremendous growth in the
investments in corporate sector against the traditional firm and proprietor
culture in India. So, the need arise to make the investors feel safe about
their investment, to ensure that the affairs of the company are in the best
interest of the shareholders and stakeholders as they don’t play any active
role in the day-to-day management of the Company. In other words, a company is
run by a democratic body i.e. Board of Directors elected by the Shareholders
and by the Officers duly appointed by such Board of Directors. As all the day
to day affairs and decision making of the company are managed by the Board of
Directors except those reserved for shareholders, it is therefore necessary to
ensure that the company affairs are being managed in the best interest of the
shareholders.
Corporate governance is about
commitment to values and ethical business conduct. It is about how best an
organization is managed for the benefit of shareholders. This includes its
culture, policies and the manner it deals with various stakeholders. The most
important part of corporate governance is timely and accurate disclosure of
information regarding the financial position, performance, ownership and
governance of the company.
II. Corporate
Governance in India
Various statues have been enacted
around the world to protect the interests of the shareholders and reestablish
the confidence of shareholders which is lost to due major corporate frauds like
Enronby corporate governance like Sarbanes Oxley Act 2002 in USA, In India Clause
49 of Listing agreement with SEBI and companies act deals with corporate governance requirement.
Companies Act 1956 takes care of
corporate governance by inserting certain provisions like Director
responsibility statement under Section 217(2AA), Audit committee under Section
292A and Cap on Managerial Remuneration through Schedule XIII etc.
Corporate
governance is about how organizations are directed controlled and held
accountable to the shareholders. SEBI is continuously working in regulating the
corporates in India to protect the interest of various stake holders. A
Voluntary disclosure started by some well-managed and socially concerned
companies has become an order of the day in corporate reporting.
The benefits of
compliance with corporate governance norms include
- Improved Equity Price performance as the Investors will be willing to pay more price for a well governed company
- Higher Valuations & Access to Global Markets
- Increase in Investor Goodwill & Confidence which in turn increase the quantum of investment by the Investors.
III. Evaluation
of Clause 49
In India Clause 49 of the Listing
agreement deals with corporate governance norms that a listed entity should
follow, was first introduced in the financial year 2000-01 based on the
recommendations of Kumar Mangalam Birla Committee. Post implementation of the
clause 49 after 2 years SEBI in order to evaluate the adequacy of the existing
practices and to further improve the existing practices setup a committee under
the Chairmanship of Mr. Narayana Murthy during 2002-03. Mr.Narayana Murthy
committee recommendations in August 2003 and informed stock exchanges to revise
Clause 49 accordingly which led to protests and representations from the
industry which forced Mr.Murthy committee to meet and revise the earlier
recommendations and the same was kept on SEBI website for comments and finally
on 29th October 2004 SEBI announced revised Clause 49 which is to be
implemented by the end of the financial year 2004-05.The revised
recommendations have considerably diluted the original Murthy Committee
recommendations which include. Independence of Directors, Whistle Blower
policy, performance evaluation and training to non-executive directors which
are included in Non-Mandatory requirements.
IV.
Applicability
and Requirements
It
is very important to know the key applicability and requirements of Clause 49
which can help to understand the role of chartered accountant in corporate
governance.
A. Applicablity
Every
Listed company on listing with stock exchanges shall agree to comply with all
the clauses in listing agreement. All the entities seeking listing for the
first time after revision of clause 49 should adhere to the revised provisions
of clause 49.
Existing
entities which are listed before revision of clause 49 should adhere to the
revised provisions as per the schedule of implementation.
It
shall apply to entities other than companies to the extent it does not violate
their respective statutes, and other guidelines issued by the regulatory
authorities. The revised clause 49 is not applicable to Mutual Fund Schemes.
B. Requirements of Clause 49
1. Board of Directors
Requirements in relation to Board of
Directors are mainly in regard to composition of the board, Non-executive
director’s compensation and disclosures, Provisions regarding Board and
committee meetings and Code of conduct.
The board shall have an optimum
combination of executive and non-executive directors comprising a minimum of
50% by Non-executive directors of total board of directors.
If the chairman of the Board is a
non-executive directors at least one-third of the Board should comprise of
Independent directors and in case he is an executive
director or a non-executive directors who is a promoter of the company or is
related to any promoter of person occupying management positions at the Board
level or at one level below the Board, at least half of the Board should
comprise of independent directors.
Clause 49 prescribes some tests, which
a non-executive director needs to pass to qualify as an Independent.
In general no one is invited to join a
board to act as a non-executive director unless they are well known to promoter
group as they need support from the promoter group for their reelection. So,
the question is whether the independent directors are really independent in practice.
Well, if a director is well eminent in his own field and a person of attitude
and conscious about his responsibilities will always ask right questions at
board meetings whether he holds the independent status or not.
The companies with independent and
professional management have recorded a good success rate in the history which
includes companies like L & T.
All the listed companies should obtain
a declaration annually from all the independent directors confirming compliance
with all six conditions of independence.
All the fees/compensation (other than
sitting fees within the limits prescribed under the Companies Act, 1956), if
any paid to non-executive directors, including independent directors, shall be
fixed by Board of Directors with previous approval of shareholders in general
meeting. If there is stock option, the limit for the maximum number that can be
granted to non-executive directors in any financial year and in aggregate
should be disclosed.
The Board shall meet at least four
times a year with a maximum time gap of four months between each consecutive meeting.
A director shall not be a member in more than 10 committees or act as Chairman
of more than five committees across all companies in which he is a director and
in addition every director need to inform all those companies about the
committee positions he occupies in each company and changes in any takes place.
The Board shall
lay down a code of conduct for all Board members and senior management of the
company. The code of conduct shall be posted on the website of the company.
All Board members
and senior management personnel shall affirm compliance with the code on an
annual basis. The Annual Report of the company shall contain a declaration to
the effect signed by the CEO
2. Audit committee
A qualified and independent audit
committee shall be setup with minimum three directors as its members. Two-third
of the members of Audit committee shall be independent directors and the
chairman of the committee shall be an independent director. All the members of
the committee shall be financially literate and at least one member shall have
accounting or related financial management expertise. The audit committee
should meet at least four times in a year and the gap between each meeting
shall not be more than four months.
Role
of Audit committee includes matters to be included in Director’s responsibility
statement, reviewing the functioning of Whistle blower mechanism if existing
and review of performance of statutory and internal auditors.
In
addition to the above the audit committee reviews Management discussion and
analysis of Financial condition and results of operations, statement of
significant related party transactions, Management letter/ Letters of internal
control weaknesses issued by the statutory auditors and Internal audit reports.
The
commitment and ethical behavior of a person is more important than the
qualifications and experience. One classic example of this could be Chairman of
Enron’s audit committee who was a Stanford Professor with 30 years of
experience in auditing and accounts.
3. Subsidiary companies
The requirements
in relation to subsidiary of a holding company required to comply with clause
49 are as follows.
1. At least one
independent director on the Board of Directors of the holding company shall be
a director on the Board of Directors of a material non listed Indian subsidiary
company.
2. The Audit
Committee of the listed holding company shall also review the financial
statements, in particular, the investments made by the unlisted subsidiary
company.
3. The minutes of
the Board meetings of the unlisted subsidiary company shall be placed at the
Board meeting of the listed holding company. The management should periodically
bring to the attention of the Board of Directors of the listed holding company,
a statement of all significant transactions and arrangements entered into by
the unlisted subsidiary company.
4. Disclosures
The following are the disclosure
requirements to be complied with.
1. A statement on transactions with
related parties in the ordinary course of business shall be placed before the
Audit committee periodically.
2. Details of
material individual transactions with related parties which are not in the
normal course of business shall be placed before the audit committee.
3.
Details of material individual transactions
with related parties or others, which are not on an arm’s length basis, should
be placed before the audit committee, together with Management’s justification
for the same.
4. Financial statements should disclose
together with management’s explanation any accounting treatment different from
that prescribed in Accounting standard.
5.
The company shall lay down procedures to
inform Board members about the risk assessment and minimization procedures
which shall be periodically reviewed by the Board.
6.
The company shall disclose to the Audit
committee on a quarterly basis the use of funds raised through
public/rights/preferential issues. Annually a statement showing use of funds
for purposes other than those stated in Offer document/prospectus should be
placed before the Audit committee and the same is to be certified by the
Statutory Auditors.
7. A detailed disclosure is to be given
on criteria remuneration of directors which include criteria of making payments
to non-executive directors, shares and convertible instruments held by
non-executive directors, and shareholding (own, beneficial basis) of
non-executive directors to be disclosed in the notice of general meeting called
for approving appointment of such director.
8. In addition to above disclosure is to
be given in respect of Management Discussion and Analysis report which should
form part of the Annual Report to the shareholders and In case of appointment
of a new director or reappointment of an existing director the shareholders are
to be provided with detailed information relating to the directors.
5. CEO\CFO Certification
This requirement is similar to that of
Sarbanes Oxley Act. This requires CEO and CFO to certify to the Board the
annual financial statements in the prescribed format regarding true and fair
view of the company’s affairs and compliance with applicable accounting
standards, Laws and regulations.
6. Report on Corporate Governance
The Company shall submit a quarterly
compliance report to the stock exchanges within 15 days from the close of
quarter in a specified format.
In addition to the quarterly
compliance reportthere shall be a separate section on Corporate Governance in
the Annual Reports of company with a detailed report on Corporate Governance.
Reasons for Non-compliance of any mandatory requirements of this clause should
be disclosed. Voluntary compliance with the Non-mandatory requirementsif any is
to be specifically highlighted.
7. Compliance
The company shall
obtain a certificate from either the statutory auditors of the company or from
a practicing company secretary regarding compliance of conditions of corporate
governance as stipulated in this clause and annex the certificate with the
directors’ report, which is sent annually to all the shareholders of the
company. The same certificate shall also be sent to the Stock Exchanges along
with the annual report filed by the company.
8. Non-Mandatory
Requirements
Some of the recommendations of Mr.
Narayana Murthy committee were included in the Non-Mandatory requirements under
this clause compliance of which is not mandatory but the company can highlight
the same in its corporate governance reporting there by reflecting the
company’s commitment towards Better Corporate Governance practice. The
Important Non-Mandatory requirements under this clause include the following.
1. Independent directors may not have tenure
exceeding in the aggregate a period of nine years on the board of the company.
The company may ensure that the persons being appointed as independent
directors are persons possessing requisite qualifications and experience that
enable him to contribute effectively to the company.
2. The board may setup a remuneration
committee consisting of all non-executive directors and chairman being an
independent director to fix the remuneration packages on behalf of
shareholders.
3. A half-yearly
declaration of financial performance including summary of the significant
events in last six-months, may be sent to each household of shareholders.
4. Company may move
towards a regime of unqualified financial statements.
5. A company may
train its Board members in the business model of the company as well as the
risk profile of the business parameters of the company, their responsibilities
as directors, and the best ways to discharge them.
6. Performance evaluation of
non-executive directors by a peer group comprising the entire Board (excluding
director being evaluated) and the evaluation could be the mechanism to
determine whether to extend/ continue the terms of appointment of non-executive
director.
7. Last and the important requirement is Whistle Blower Policy. The Whistle
Blower Policy may be established as a mechanism for employees to report the
management concerns about unethical behavior, actual or suspected fraud or
violation of the company’s code of conduct or ethics policy. This could also provide
for adequate safeguards against victimization of employees who Blow the Whistle
and also provide direct access to the Chairman of the Audit committee in
exceptional cases.
V.
Role
of Chartered Accountant in Corporate Governance
With
the knowledge of requirements of clause 49 and Companies act we can say that
the role of chartered Accountants in corporate governance is very exhaustive.
We can be the outsiders to provide required guidance to achieve best practices
in corporate governance or we can also be the part of the entity to implement
those best practices. The role of a chartered account can involve any of the
following activities.
2. Guiding and Assisting the entity in
Implementing required Internal Control Framework that takes care of corporate
governance
3. Benchmarking and improving the
Entities Governance procedures in line with the best practices
4. Certification as require under the
provisions of Clause 49 as explained above
5. Internal audit to ensure the
compliance of clause 49
6. Confirmation that the entity has
complied with the various statues that include corporate governance concepts
like companies act as explained above.
7. Lastly to comply with the requirements
when acting as a director or CEO\CFO of the entity.
VI. Conclusion
Corporate Governance has improved a
lot by incorporating clause 49 in listing agreement but there is still
confusion in the investors about the security and safety of their investments
due to recent frauds like in case of Satyam computers in India. This confusion
can be dealt by further refining the provisions like making the Non-Mandatory
provisions Mandatory etc. And also, the Chartered accountants play a vital role
in this aspect. As we are charged with a great responsible position out of all
persons who are part of corporate governance, we should be awake all the time
and use our professional skepticism to support the Corporate Governance.
