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Corporate Governance Principles and Practices

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Title: Corporate Governance Principles and Practices


1
Corporate Governance Principles and Practices
  • Presentation by N K Jain,
  • Secretary CEO
  • The Institute of Company Secretaries of India

ICSI HOUSE, 22, INSTITUTIONAL AREA, LODI ROAD,
NEW DELHI 110003
2
Why Corporate Governance?
3
Satyam Vada Dharmam Chara
- Taittariya Upanishad
4
  • Forever speak the truth and follow the dharma

5
  • Truth Disclosure of Actual State of Affairs
    (Transparency in operations and transactions)

6
  • Dharma Dharma is for the stability of society,
    the maintenance of social order and the general
    well-being and progress of humankind.
  • - Karna Parva of the Mahabharata. Verse-58 in
    Chapter 69

7
  • Corporates are also expected to use their

Capacity, Knowledge and Resources
TOWARDS
Dharma
Maximisation of stakeholders value and
well-being and progress of humankind
THROUGH
Truth
Transparency, accountability and truthful
disclosure of state of affairs
8
  • This is our own age old mantra of
  • Good Governance

9
Definition of Corporate Governance
  • "Corporate governance is the system by which
    business corporations are directed and
    controlled. The corporate governance structure
    specifies the distribution of rights and
    responsibilities among different participants in
    the corporation, such as the board, managers,
    shareholders and other stakeholders, and spells
    out the rules and procedures for making decisions
    on corporate affairs. By doing this, it also
    provides the structure through which the company
    objectives are set, and the means of attaining
    those objectives and monitoring performance."

10
ICSI Definition of Corporate Governance
  • Corporate Governance is the application of best
    management practices, compliance of law in true
    letter and spirit and adherence to ethical
    standards for effective management and
    distribution of wealth and discharge of social
    responsibility for the sustainable development of
    all stakeholders.

11
Corporate Governance Pillars
Responsibility
Effectiveness
Fairness
R Responsibility A Accountability F
Fairness T Transparency
RAFT contributes to effectiveness!
Transparency
12
OECD Principles on Corporate Governance
  • I. Ensuring the basis for an effective corporate
    governance framework
  • The corporate governance framework should
    promote transparent and efficient markets, be
    consistent with the rule of law and clearly
    articulate the division of responsibilities among
    different supervisory, regulatory and enforcement
    authorities.
  • II. The rights of shareholders and key ownership
    functions
  • The corporate governance framework should
    protect and facilitate the exercise of
    shareholders rights.

13
OECD Principles on Corporate Governance
  • III. The role of stakeholders in corporate
    governance
  • The corporate governance framework should
    recognise the rights of stakeholders established
    by law or through mutual agreements and encourage
    active co-operation between corporations and
    stakeholders in creating wealth, jobs, and the
    sustainability of financially sound enterprises.
  • IV. The equitable treatment of shareholders
  • The corporate governance framework should
    ensure the equitable treatment of all
    shareholders, including minority and foreign
    shareholders. All shareholders should have the
    opportunity to obtain effective redress for
    violation of their rights.

14
OECD Principles on Corporate Governance
  • V. Disclosure and transparency
  • The corporate governance framework should ensure
    that timely and accurate disclosure is made on
    all material matters regarding the corporation,
    including the financial situation, performance,
    ownership, and governance of the company.
  • VI. The responsibilities of the board
  • The corporate governance framework should ensure
    the strategic guidance of the company, the
    effective monitoring of management by the board,
    and the boards accountability to the company and
    the shareholders.

15
  • Corporate Governance rests with the Vision and
    Perception of the Leadership
  • and
  • A Leader need to adopt a
  • Vision for Corporate Governance

16
THE BOARD
  • What is a boards purpose?
  • What do boards do?

17
Boards Role
  • The boards role is to provide entrepreneurial
    leadership of the company within a framework of
    prudent and effective controls

18
Boards Role
  • ensuring appropriate directions with regard to
    vision, mission, strategy, policies, monitoring,
    supervision, accountability to shareholders and
    other stakeholders
  • achieving greater levels of performance on a
    sustained basis
  • providing a competitive edge to the company
  • ensuring statutory compliances by the company
  • adherence to the best practices of good corporate
    governance
  • development of human capital and succession
    planning
  • risk management.

19
Board Responsibilities
  • Develop the companys purpose, vision, values
  • Guide strategy
  • Oversee management
  • Monitor corporate governance
  • Ensure that controls are in place
  • Oversee disclosure, communications

20
Difference Between Directing, Managing
Directing Managing
Collective decision making Individual decision making
Duties and responsibilities to shareowners, company and other stakeholders. Specific to department
Directors report regularly to shareowners Report to Board
Leadership vision, strategy Implement vision, strategy
Approve, abide by ethic codes Abide by ethic code
Joint and several liability Several liabilities
21
Board Charter
  • Guidelines on Corporate Governance for Central
    Public Sector Undertakings
  • The Board should have a formal statement of Board
    Charter which clearly defines the roles and
    responsibilities of the Board and individual
    directors.
  • The need to establish board charter has not been
    prescribed in Clause 49

21
22
Types of Boards
  • Passive
  • Certifying
  • Engaging
  • Intervening
  • Operating
  • Trophy
  • Paper
  • Rubber Stamping
  • Country Club

23
What Boards ought to be
  • Knowing enough about the company to answer for
    its actions yet being able to stand back from day
    to day management.
  • Sensitive to the pressure of short term issues
    and yet being informed about broader and
    long-term trends.
  • Focus on businesss commercial activities while
    acting responsibly towards its employees,
    business partners and society.

23
24
What Directors should do.
  • Support executives in their leadership of the
    business while monitoring their conduct.
  • Question intelligently, debate constructively,
    challenge rigorously and decide dispassionately.
  • gain the trust and respect of other board members.

24
25
What Boards want to focus on
  • Succession planning
  • Strategic planning.
  • Risk management
  • Meeting managers from key parts of the company.
  • Developing Human Capital
  • Information Technology Issues
  • Regulatory Compliance
  • Executive Compensation
  • Sustainability
  • Bribery and Anti- Corruption Concerns
  • Source PWC Annual Corporate Directors
    Survey 2011

26
Barriers to Board Effectiveness
  • Temptation to micro-manage.
  • Ineffective Nominating Committee.
  • Lack of Board renewal
  • Failure to remove unproductive members.
  • Lack of functioning committee structure.
  • Lack of strategic plan.
  • No plan for synergizing new and old members.
  • Lack of a formal plan of board training and
    education

27
Do Any Statutory Duties of Directors exist in the
following areas?
  • Employee rights
  • Health and safety rights
  • Shareholder rights
  • Customer rights
  • Community
  • Human rights
  • The environment

28
Companies Bill, 2011 Directors Duties
  • (1) a director of a company shall act in
    accordance with the articles of the company.
  • (2) A director of a company shall act in good
    faith in order to promote the objects of the
    company for the benefit of its members as a
    whole, and in the best interests of the company,
    its employees, the shareholders, the community
    and for the protection of environment.
  • (3) A director of a company shall exercise his
    duties with due and reasonable care, skill and
    diligence and shall exercise independent judgment.

29
Companies Bill, 2011 Directors Duties
  • (4) A director of a company shall not involve in
    a situation in which he may have a direct or
    indirect interest that conflicts, or possibly may
    conflict, with the interest of the company.
  • (5) A director of a company 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 under sub-section
    (7), he shall be liable to pay an amount equal to
    that gain to the company.

30
Features of a well run board
  • An optimum balance of well-chosen and competent
    directors.
  • Regular meetings.
  • Sets challenging organizational goals.
  • Constantly reviews performance.
  • Competence building and evaluation/ appraisal
    systems.
  • Adoption and implementation of good governance
    practices.

31
Board Size
  • Companies should choose a board size that will
    enable them to
  • Hold productive, constructive discussions
  • Make prompt, rational decisions
  • Efficiently organize the work of its committees
    if these are established

32
Average Number of Directors per Board by Country
(Abroad)
Country Number of Directors
UK 8.3
Netherlands 8.6
Switzerland 9.8
Sweden 10.8
Belgium 12.9
Portugal 14.1
France 14.3
Spain 14.7
Italy 15.5
Germany 19.1
European Average in 2007 12.8
Source Raising the bar Corporate Governance in
Europe, Heidrick and Struggles
32
33
Number of Directors per Board in Select PSUs
(India)2009-10
PSU Executive Directors Non-Executive Directors Total
Indian Oil Corporation 6 8 14
Oil And Natural Gas Corporation 7 6 13
Gail (India) Limited 5 7 12
Bharat Heavy Electricals Limited 6 5 11
National Aluminium Company Limited 6 10 16
Hindustan Petroleum Corporation limited 4 3 7
SAIL 8 6 14
Chennai Petroleum Corporation Limited 3 8 11
Power Grid Corporation Of India 5 5 10
Oil India Limited 3 8 11
33
34
Composition of the Board
  • Size of the Board
  • An ideal board should have 9 to 11 members.

35
The Balanced Board
  • Balance is to be maintained between
  • Executive directors/non-executive directors
    (ED/NED)
  • Independent directors (ID)
  • Appropriate skills, experience, and attributes of
    members of the Board

36
Composition (contd.)
  • Clause 49 of Listing Agreement (India)
  • Non Executive Chairman at least 1/3rd BODs to
    be ID
  • Executive Chairman/Non-executive Chairman is
    promoter or a relativeof promoter at least ½
    BODs to be ID

37
Board Processes
  • Meeting preparation
  • Conducting meetings
  • Follow-up and in-between meetings
  • Board member roles, responsibilities

38
Meeting Preparation
  • Setting the agenda and its content
  • The annual calendar
  • Board meeting frequency
  • Board briefing papers, management reports

39
Setting the Agenda, its content Key Success
Factors
  • A balance between the reviews of past performance
    and discussion of forward-looking issues
  • Ample time for debate
  • Not too much time on routine or administrative
    matters

40
Agenda Items
  • Agenda items in UK Board Meeting ( of boards)
  • 4-5 6
  • 6-7 18
  • 8-10 59
  • 11-12 14
  • Over 13 1

41
Agenda Annual Calendar
  • An Annual Calendar be drawn up detailing what
    strategic priorities would be discussed at each
    of the meetings during the year.

42
Board Meeting Duration
  • Duration of average board meeting ( of UK board)
  • Under 2 hours 12
  • 2-4 hours 62
  • 4-6 hours 25
  • Over 6 hours 1

43
Red Flags For Boards
  • Do the meetings finish on time?
  • Are directors rarely absent?
  • Are the meetings thorough in discussion?
  • Are you presented with strong analysis and
    thorough reports?
  • Does the board receive effective, concise
    presentations?
  • Are the directors sufficiently provided with
    needed information?
  • Are you presented with sufficient time before the
    board meeting to prepare?
  • Are you only told what the executive wants you to
    be told?
  • Is information kept confidential within the
    boardroom?

43
44
44
45
Challenge IGender Diversity
  • The issue of gender diversity on boards has
    received increasing attention globally.
  • While some countries such as Norway and France
    have introduced mandatory quotas, other countries
    are seriously discussing intervention to tackle
    this issue.
  • In India, women comprise only 5.3 per cent of
    BSE 100 company boards
  • This percentage compares unfavourably not just
    with Canada (15.0), the US (14.5) and the UK
    (12.2), but also markets such as Hong Kong
    (8.9) and Australia (8.3).

45
46
Challenge IIDirector Development
  • Clause 49
  • 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.

47
Training of Board Members
  • ICSI Research study shows that companies have
    started to focus on the training/development
    needs of the Board of Directors specially the new
    directors inducted on the Board.
  • On an average 56 Companies have provided
    training to its Board Members during the years
    2009-2011 as compared to Just 40 in 2008-09.
  • Companies Like GAIL (India) Ltd, CMC Ltd., ONGC,
    HCL Technologies Ltd. etc. are providing training
    to its Board Members to cater their development
    needs.

47
48
Challenge IIILead Independent Director
  • Good governance norms recommend appointment of
    Lead Independent Director on the Board, if the
    position of Chairman and CEO are held by the same
    person.
  • In the light of ICSI Research study, this area
    needs focus from Indian corporate sector.
  • Less than 5 of the top companies have appointed
    lead Independent Director (LID).
  • Companies like Infosys, Wipro, Vedanta Resources
    Plc have appointed Lead Independent Director.

48
49
Challenge IVPerformance Evaluation
  • Companies Bill 2011-Schedule IV (Code for
    Independent Directors)
  • The performance evaluation of independent
    directors shall be done by the entire Board of
    Directors, excluding the director being
    evaluated.
  • (2) On the basis of the report of performance
    evaluation, it shall be determined whether to
    extend or continue the term of appointment of the
    independent director.

49
50
Performance Evaluation
  • ICSI Research Study shows that this is an area
    where Indian companies need to focus as only 15
    companies provide the mechanism for Board
    Evaluation.
  • Companies Like CMC Ltd, Nucleus Software Exports
    Ltd., GTL Ltd. provides the mechanism for Board
    Evaluation.

50
51
"You may never know what results come of your
action, but if you do nothing there will be no
result"
-Mahatma Gandhi
51
52
Challenge VNomination Committee
  • Role
  • Considers matters relating to corporate
    governance, including the composition of the
    board and the selection and appointment of board
    members
  • Oversees the annual performance evaluation of the
    board, its committees, and the individual
    directors
  • Reviews strategic human resource decisions,
    succession plans for the chairman and other key
    board and executive positions

53
Nomination Committee- Indian Regulatory Framework
  • Orissa PSU Selection of Functional and
    independent directors shall be made by the PESB
    and approved by the Chief Minister.
  • Clause 49 nothing specified w.r.t . Nomination
    Committee

54
Companies Bill 2011
  • (1) listed company to constitute the Nomination
    and Remuneration Committee consisting of three or
    more non-executive directors out of which not
    less than one half shall be independent
    directors.
  • (2) The Nomination and Remuneration Committee
    shall identify persons who are qualified to
    become directors and who may be appointed in
    senior management in accordance with the criteria
    laid down, recommend to the Board their
    appointment and removal and shall carry out
    evaluation of every directors performance.

55
Nomination Committee
  • ICSI Research study on Board Committees shows
    that the only 20 companies have constituted
    nomination committees.
  • Companies like Persistent Systems Limited, ING
    Vysya Bank Ltd., Union Bank of India are few
    amongst other who have constituted nomination
    committee.

56
  • GREATER CHALLENGE

57
DISCLOSURE AND TRANSPARENCY ARE AT THE HEART OF
CORPORATE GOVERNANCE
58
OECD Principles on Disclosure and Transparency
  • The financial and operating results of the
    company.
  • Company objectives.
  • Major share ownership and voting rights.
  • Remuneration policy for members of the board and
    key executives, and information about board
    members
  • Related party transactions.
  • Foreseeable risk factors.
  • Issues regarding employees and other
    stakeholders.
  • Governance structures and policies, in
    particular, the content of any corporate
    governance code or policy and the process by
    which it is implemented.

59
  • TRANSPARENCY AND DISCLOSURE
  • Government may advise all PSUs to make disclosure
    through its website on matters relating to
    stakeholders regularly on a real-time basis, such
    as
  • Details of its business, financial information,
    shareholding pattern, compliance with Corporate
    Governance, contact information of persons
    responsible for investor grievance handling, etc.

59
60
  • Non - financial Disclosures
  • Business reporting covers mainly financial
    information. Non-financial disclosures are
    equally important to stakeholders.
  • The Secretarial Standards Board of ICSI has
    brought out a Guidance Note on Non-financial
    Disclosures which stipulates disclosure on
  • A. Company Profile
  • B. Corporate Governance Report
  • Ownership and shareholders rights including
    changes in control
  • Governance Structure and Policies
  • Secretarial Audit
  • Detailed information about the Board
  • Particulars of Internal Auditors
  • Risk Management Framework
  • Existence of Internal Code of Conduct, Business
    Ethics and Whistle Blower Mechanism
  • Commitment to external initiatives
    contd.

60
61
  • Non - financial Disclosures
  • C. Sustainability Report
  • Economic Performance
  • Environmental Performance
  • Social Performance
  • Value Statements
  • CSR Initiatives
  • D. Innovation Strategy / Research Development
  • E. Intangible Assets Reporting
  • PSUs may be advised to follow the above Guidance
    Note towards establishing better governance.

61
62
Non-financial reporting Frameworks
  • Global Reporting Initiative (GRI) Guidelines
    G3.1 ONGC,
  • UN Global Compact GAIL, SAIL, Power Grid
    Corporation,
  • National Voluntary Guidelines on Social,
    Environmental and Economic Responsibilities of
    Business issued by the Ministry of Corporate
    Affairs

63
COMMITTING TRANSPARENCY
64
Transparency International -Integrity Pact
  • Transparency Internationals Integrity Pact -A
    specific tool used to build transparency in
    public procurement, bidding or licensing process
    by both public institutions and private agencies.
  • A number of PSUs have signed the Integrity Pact
    Eg. GAIL, ONGC, NTPC
  • Orissa Power Generation Corporation is the First
    State PSU to sign the Integrity Pact

65
  • Companies that have followed these
  • principles of
  • Corporate Governance
  • have
  • Consistently earned high returns,
  • increased their net worth and
  • enhanced their shareholders wealth

66
  • Large and Significant Positive effect of the
    governance reforms - amounting to over 10 of
    Firm value
  • Role of Enforcement Legal rules show no
    discernible effect until stronger sanctions
    introduced.
  • Research Study Corporate Governance and Firm
    Value by Dhammika Dharmapala and Vikramaditya
    Khanna

67
Evidence from Mckinsey Survey
  • In companies with good corporate governance,
    based on parameters of Accountability,
    Disclosure, Transparency and Shareholder
    equality, investors were willing to pay a
    premium of 28 on the shares of such companies.

68
Key take-aways
  • EASY FINANCE FROM INSTITUTIONS
  • BETTER ACCESS TO GLOBAL MARKET
  • LOWER COST OF CAPITAL
  • BRAND EQUITY/BRAND VALUE
  • GROWTH IN
  • REVENUE
  • PROFITS
  • MARKET VALUE
  • HIGHER PREMIUM ON SHARES ISSUED
  • WIDENING CUSTOMER BASE
  • BETTER PRICE FOR PRODUCTS

69
Key take-aways
  • BETTER ACCESS TO HUMAN CAPITAL
  • GREATER CONFIDENCE OF REGULATORS AND LAW
    ENFORCEMENT AUTHORITIES IN THE COUNTRY AND ABROAD
  • ENHANCED TRUST OF STAKEHOLDERS
  • SMEs - POTENTIAL TO EXPAND. CAN ALSO ACCESS
    MARKET FOR FUNDS AT OPTIMUM COST
  • REPUTATION AND CREDIBILITY, GOODWILL
  • REDUCED RISK OF CORPORATE CRISIS AND SCANDALS
  • ENHANCE CAPACITY OF RISK MITIGATION

70
THANK YOU
Disclaimer Clause Views expressed in this
presentation views of the author do not necessary
reflect those of the Institute.
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