Conceptual Framework of Corporate Governance – Governance, Risk Management, Compliances and Ethics Important Questions
Question 1.
Justify the ICSI principles of Corporate Governance on ‘sustainable development of all stakeholders’, ‘discharge of social responsibility’ and ‘effective management and distribution of wealth’ which seem to be very important principles for corporate.
OR
Briefly comment on the following : ICSI principles of Corporate Governance, inter alia, include sustainable development of all stakeholders and i adherence to ethical standards.
Answer:
According to the Institute of Company Secretaries of India: “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 sustainable development of all stakeholders.”
The aforesaid principal emphasizes on:
- ‘Sustainable development of all stakeholders’ ensures growth of all individuals associated with or affected by the enterprise on sustainable basis.
- ‘Discharge of social responsibility ensures that enterprise is acceptable to the society in which it is functioning.
- ‘Effective management and distribution of wealth’ ensures that enterprise creates maximum wealth and judiciously uses the wealth so created for providing maximum benefits to all stakeholders and enhancing its wealth creation capabilities to maintain sustainability.
Question 2.
Answer the following in brief; Board should have a proper blend of skills for effective and good corporate governance. Explain.
Answer:
Good governance is the prime concern of the Board. To be able to undertake its functions efficiently and effectively, the Board must possess the necessary blend of qualities, skills, knowledge and experience. Each of the directors should make quality contribution.
A Board should have a mix of the following skills, knowledge and experience:
- Operational or technical expertise, commitment to establish leadership
- Financial skills
- Legal skills
- Knowledge of Government and regulatory requirement or subject expert in which the company is in operation so as that company may get the benefit of director’s specialization.
Question 3.
Briefly comment on the following statements; Independent Board is essential for sound corporate governance.
Answer:
An independent board is constituted by appointing independent directors in the Board. Independence of directors would ensure that there are no actual or perceived conflicts of interest. It also ensures that the Board is effective in supervising and, where necessary, challenging the activities of management. The Board needs to be capable of assessing the performance of managers with an objective perspective.
Accordingly, the majority of Board members should be independent of both the management team and any commercial dealings with the company for ensuring good governance. Thus an independent board is essential for sound corporate governance.
Question 4.
Corporate governance is integral to the existence of a company.
Answer:
Corporate Governance is needed to create a corporate culture of transparency, accountability and disclosure. Following are the advantages of good corporate governance:
- Good corporate governance ensures corporate success and economic growth.
- Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and effectively.
- There is a positive impact on the share price.
- It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
- Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
- It helps in brand formation and development.
- It ensures organization is managed in a manner that fits the best interests of all.
- It reduces cost and aids in long term sustenance and growth of the Company.
Thus Corporate Governance is integral to the existence of the company.
Question 5.
Elucidate the following; Need for corporate governance.
OR
How important is corporate governance for success of an organization?
OR
“Good Corporate Governance is about intellectual honesty and not just sticking to rules and regulations. It has been observed that capital comfort-ably flows toward companies that practice this type of good governance”. Briefly comment.
OR
Corporate governance extends beyond corporate law. Its fundamental objective is not mere fulfillment of the requirements of law but in ensuring commitment of the board of directors in managing the company in transparent manner for maximizing stakeholder value.
In the light of this statement discuss the various factors which add greater value through good governance.
Answer:
Corporate governance acts as a spirited move towards achievement of excellence by a corporate not only in terms of increased profits and revenue but also respectability for the laws of the land, protection of interests of shareholders, creditors, employees and other stakeholders of the organisation. Corporate Governance is needed to create a Corporate Culture of Transparency, Accountability and Disclosure.
| Components: | Meaning: |
| Corporate Performance | Improved governance structures and processes ensure quality decision making, encourage effective succession planning for senior management and enhance long-term prosperity of companies. |
| Enhanced Investor Trust | Investors consider corporate governance as important financial performance when evaluating companies for investment. |
| Better Access to Global Market | Corporate governance systems attracts investments from global investors. |
| Combating Corruption | Companies that are transparent, provide environment where corruption would certainly fade out, makes companies more efficient and prevents malpractices. |
| Easy finance from Institutions | The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company. |
| Enhancing Enterprise Valuation | Improved management accountability and operational transparency increases the value of corporation. |
| Reduced Risk of corporate crisis and scandals | Effective corporate Governance ensures efficient risk mitigation systems in place. |
| Accountability | Good Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to the stakeholders. |
Good Corporate Governance is integral to the existence of the company and ensures the following:
Question 6.
Good corporate are not born but are made by the combined efforts of all stakeholder board of directors government and the society at large. In the light of this statement bring out the elements of good corporate government in India.
Answer:
Some of the important elements of good corporate governance are discussed as under:
1. Role and powers of Board : Good governance is decisively the manifestation of personal beliefs and values which configure the organizational values, beliefs and actions of its Board.
2. Legislation : Clear and unambiguous legislation and regulations are fundamental to effective corporate governance.
3. Management environment : Management environment includes setting-up of clear objectives and appropriate ethical framework, establishing due processes, providing for transparency and clear enunciation of responsibility and accountability, implementing sound business planning, encouraging business risk assessment, having right people and right skill for the jobs, establishing clear boundaries for acceptable behavior, establishing performance evaluation measures and evaluating performance and sufficiently recognizing individual and group contribution within the organization.
4. Board skills : To be able to undertake its functions efficiently and effectively, the Board must possess the necessary blend of qualities, skills, knowledge and experience. A Board should have a mix of the following skills, knowledge and experience:
- Operational or technical expertise, commitment to establish leadership.
- Financial skills.
- Legal skills.
- Knowledge of Government and regulatory requirement.
5. Board appointments: A well-defined and open procedure must be in place for re-appointments as well as for appointment of new directors. The role of the board of directors was summarized by the King Report (South African report on corporate governance)-as:
- To define the purpose of the company.
- To define the values by which the company will perform its daily duties.
- To identify the stakeholders relevant to the company.
- To develop a strategy combining these factors.
- To ensure implementation of this strategy.
6. Strategy setting: The objectives of the company must be clearly documented in a long-term corporate strategy including an annual business plan together with achievable and measurable performance targets and milestones.
7. Business and community obligations: Though basic activity of a business entity is inherently commercial yet it must also take care of community’s obligations.
8. Financial and operational reporting: The Board requires comprehensive, regular, reliable, timely, correct and relevant information to discharge its functions. Therefore, a clearly defined performance measures – financial and non-financial should be prescribed.
9. Monitoring the Board performance: The Board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance indicators besides peer review.
10. Audit Committee: Internal and statutory audits, reviewing the adequacy of internal control and compliance with significant policies and procedures, reporting to the Board on the key issues are to main function of audit committee. The quality of Audit Committee significantly contributes to the governance of the company.
(Note: This list is inclusive and not exhaustive)
Question 7.
Answer the following in brief; Discuss the role and powers of the Board with respect to good corporate governance.
Answer:
As an element of good corporate governance the role of the Board should be clearly documented in a Board Charter. The Board as a main functionary is primary responsible to ensure value creation for its stakeholders.
The absence of clearly designated role and powers of Board weakens accountability mechanism and threatens the achievement of organizational g goals. Therefore, the foremost requirement of good governance is the clear identification of powers, roles, responsibilities and accountability of the g Board, CEO, and the chairman of the Board.
Role and powers of the Board :
- The board should retain full and effective control over the company and monitor the executive management.
- Board should exhibit total commitment to the company. An efficient and independent board should be conscious of protecting the interests of all stakeholders and should attend and actively participates in the meetings.
- The board should ensure a clearly accepted division of responsibilities at the top level of a company, which will ensure a balance of power and authority.
- The Board should ensure the company’s prosperity by collectively directing the company’s affairs, whilst meeting the appropriate interests of its shareholders and stakeholders.
Question 8.
Answer the following in brief; An owner selects the agent to work in good faith to protect their interest and remain faithful to their goals. Who do you think are the agents and owners in modern organisations?
Answer:
Company law allows for the separation of ownership and management. Management and owners may have different views on various issues in the company.
Owners of a Company – In modern organisations, the shareholders are the owners of the organisations. The owners set the central objectives of the corporation. The company ought to work according to the dictates of the shareholders. However, it is not practically possible for each shareholder to participate in the decision making process on a day-to-day basis.
Managers of a Company – Managers who are responsible for carrying out these objectives in day-to-day work of the company are ‘Agents’ of the corporation. Thus the owners authorise the mangers to act as ‘Agents’ and a contract between owner/principal and agent is made. The agent should act in good faith. He should protect the interest of the principal and should remain faithful to the goals.
Question 9
Whether the rule of majority, was established in the case of Foss v. Harbottle [(1843) 67 ER 189], is still relevant? Narrate your answer with relevant provisions of the Companies Act, 2013 and in light of the decided case law.
Answer:
In the case of Foss v. Harbottle [(1843) 67ER 189], it was held that:
The Courts would not generally interfere with the decisions of the company which it was empowered to take in so far they had been approved of by the majority and made exceptions to breaches of charter documents, fiduciary duties and frauds or oppression and inadequate notice to the shareholders.
The principle is still relevant as the Court was right in ruling that every shareholder is bound by the terms and conditions of incorporation of the company, which operated as a set of mutually binding obligations.
Interest of Minority shareholders
In the process of implementing the objectives of the company, one should not override the legitimate expectations of minority shareholders. The following are the various sections which deal with the minority shareholders under the Companies Act, 2013.
- Oppression & Mismanagement [Sections 241-246]
- Class Action Suits [Section 245]
- Appointment of director by small shareholders [Section 151]
- Promoting the confidence of minority shareholders [Schedule IV – Code for Independent Directors]
Judicial Precedent:
S. Natarajan vs. S.V. Global Mills Ltd. and Others:
In this case the minority shares are owned by S Natarajan, one of the original promoters of Binny, and his associates. This court, under Article 142 of the Constitution of India, 1950, directs that a sum of ₹ 100 crore be paid, to the respondents (associates of Natarajan) for the buy out of all the % respondents’ shares in the company. Justice R F Nariman and Justice A M g Sapre said in their order. The shares owned by the minority shareholders, is which aggregates to about 42.36 lakh shares or about 19% of share capital of the company, should be purchased within a period of nine months from the date of the order.
Thus Supreme Court, ordered S V Global (SVG) Mill, which was carved out of the 200-year-old textiles major Binny, to pay ₹ 100 crore to minority shareholders to buy them out.
Question 10.
Write a note on the following; The Greenbury Report.
Answer:
The Confederation of British Industry constituted a group under the chairmanship of Sir Richard Greenbury to make recommendations on Directors’ Remuneration. The group submitted its report in 1995, its major findings were as under:
- Constitution of a Remuneration Committee comprising of Non-Executive Directors.
- Responsibility of this committee in determining the remuneration of CEO and executive directors.
- Responsibility of the committee in determining the remuneration policy
- Level of disclosure to shareholders regarding the remuneration of directors’.
- Remuneration should be linked more explicitly to performance.
These findings were incorporated in Code of Best Practice on Directors’ Remuneration of the Report. The majority of the recommendations were incorporated in Listing Rules of London Stock Exchange.
Question 11.
Write short note on the following; The Turnbull report.
Answer:
The Turnbull Committee was established to provide direction on the internal control requirements of the Combined Code, including how to carry out risk management. The report informs directors of their obligations under the Combined Code with regard to keeping good “internal controls” in their companies, or having good audits and checks to ensure the quality of financial reporting and catch any fraud before it becomes a problem. Turnbull Committee published “Internal Control Guidance for Directors on Combined Code”.
Question 12.
Discuss in brief the following; Sarbanes-Oxley Act, 2002.
Answer:
In 2002, the United States Congress passed the Sarbanes-Oxley Act (SOX) to protect shareholders and the general public from accounting errors and fraudulent practices in enterprises, and to improve the accuracy of corporate disclosures.
Sarbanes-Oxley Act, 2002 made fundamental changes in every aspect of corporate governance in general and auditor independence, conflict of interests, corporate responsibility, enhanced financial disclosures and severe penalties for wilful default by managers and auditors. The act sets deadlines for compliance and publishes rules on requirements. The Act also created the “Public Company Accounting Oversight Board,” (PCAOB) to oversee the activities of the auditing profession. .
Following are the highlights of the most important Sarbanes-Oxley sections for compliance:
- SOX Section 302: Corporate Responsibility for Financial Reports
- SOX Section 401: Disclosures in Periodic Reports
- SOX Section 404: Management Assessment of Internal Controls
- SOX Section 409: Real Time Issuer Disclosures
- SOX Section 802: Criminal Penalties for Altering Documents
- SOX Section 806: Protection for Employees of Publicly Traded Companies who provide Evidence of Fraud
- SOX Section 902: Attempts & Conspiracies to Commit Fraud Offences
- SOX Section 906: Corporate Responsibility for Financial Reports
Question 13.
Briefly comment on the following; Corporate governance framework should protect and facilitate the exercise of shareholder’s rights.
OR
Write short note on the following; Shareholder’s rights
Answer:
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and 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:
A. Basic shareholder rights should include the right to:
- Secure methods of ownership registration
- Convey or transfer shares
- Obtain relevant and material information on the corporation on a timely and regular basis.
- Participate and vote in general shareholder meetings
- Elect and remove members of the board.
- Share in the profits of the corporation.
B. Shareholders should be sufficiently informed about, and have the right to approve or participate in, decisions concerning fundamental corporate changes.
C. Shareholders should have the opportunity to participate effectively and vote in general shareholder meeting. They should be furnished with sufficient and timely information concerning the date, location and agenda of general meetings.
D. Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.
E. All shareholders of the same series of a class should be treated equally.
F. Related-party transactions should be approved and conducted in a manner that ensures proper management of conflict of interest and protects the interest of the company and its shareholders.
G. Minority shareholders should be protected from abusive actions.
H. Markets for corporate control should be allowed to function in an efficient and transparent manner.
Question 14.
The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage’ active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enter-prises. Elucidate the statement.
Answer:
OECD has defined corporate governance to mean: “A system by which business corporations are directed and controlled”.
Fourth principle of OECD Principles of Governance provides for the role p 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, j obs, and the sustainability of financially sound enterprises.
This principle recognizes the interest of stakeholders and their contribution to the long term success of the company. The corporate governance framework should consider interest of all stakeholders and include following :
A. The rights of stakeholders that are established by law or through mutual agreements are to be respected.
B. Where stakeholder interests are protected by law, stakeholders should have the opportunity to obtain effective redress for violation of their rights.
C. Mechanisms for employee participation should be permitted to develop.
D. Where stakeholders participate in the corporate governance process, they should have access to relevant, sufficient and reliable information on a timely and regular basis.
E. Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and to the competent public authorities and their rights should not be compromised for doing this.
F. The corporate governance framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditor rights.
Question 15.
Highlight the OECD Principles of Corporate Governance with respect to Disclosures and Transparency.
Answer:
OECD has defined corporate governance to mean : “A system by which business corporations are directed and controlled”.
The OECD Principles of Corporate Governance with respect to Disclosures and transparency are given hereunder:
A. Disclosure should include, but not be limited to, material information on:
- The financial and operating results of the company.
- Company objectives and non-financial information.
- Major share ownership, including beneficial owners, and voting rights.
- Remuneration of members of the board and key executives.
- Information about board members, including their qualifications, the selection process, other company directorships and whether , they are regarded as independent by the board.
- Related party transactions.
- Foreseeable risk factors.
- Issues regarding employees and other stakeholders.
- Governance structures and policies, including the content of any corporate governance code or policy and the process by which it is implemented.
B. Information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non-financial reporting.
C. An annual audit should be conducted by an independent, competent and qualified, auditor in accordance with high-quality auditing standards in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.
D. External auditors should be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit.
E. Channels for disseminating information should provide for equal, timely and cost-efficient access to relevant information by users.
Question 16.
Discuss briefly the following; Kautilya’s four-fold duty of a king.
OR
Discuss briefly the following; Evidence of Corporate Government from Arthashastra
Answer:
Kautilya’s Arthashastra maintains that for good governance, all administrators, including the king are considered servants of the people. Good governance and stability are completely linked. If rulers are responsive, accountable, removable, recallable, there is stability. If not there is instability. These tenets hold good even today.
Kautilya’s fourfold duly of a king – The substitution of the stale with the corporation, the king with the CEO or the board of a corporation, and the subjects with the shareholders, bring out the quintessence of corporate governance, because central to the concept of corporate governance is the be¬lief that public good should be ahead of private good and that the corporation’s resources cannot be used for personal benefit.
Raksha – Protection, in the corporate scenario can be equated with the risk management aspect.
Vriddhi – Growth, in the present day context can be equated to stakeholder value enhancement.
Palana – Maintenance/compliance, in the present day context can be equated to compliance to the law in letter and spirit.
Yogakshe ma – Well being and in Kautilya’s Arthashastra is used in context of a social security system. In the present day context it can be equated to corporate social responsibility.
Question 17.
Discuss in brief the following; Arthashastra talks of self discipline for a king six enemies which a king should overcome.
Answer:
Arthashastra talks self-discipline for a king and the six enemies which a king should overcome are as follows:
- Lust
- Anger
- Greed
- Conceit
- Arrogance
- Fool hardiness
In the present day context, this addresses the ethics aspect of businesses and the personal ethics of the corporate leaders.
Question 18.
“Kautilya’s Arthashastra maintains that ‘for good governance, all administrators, including the king were considered servants of the people. Good governance and stability were completely linked.’ If the king is substituted with the Board of Directors, the same principle can be applied with Corporate Governance”.
In the light of the above statement, discuss the four fold duties of the g: Board of Directors with regard to Corporate Governance as enunciated by Kautilya and explain the six enemies of governance, which should be g; overcome by the Board of directors for ensuring good Corporate Governance.
Answer:
Kautilya’s Arthashastra maintains that for good governance, all administrators, including the king are considered servants of the people. Good governance and stability are completely linked. If rulers are responsive, accountable, removable, recallable, there is stability. If not there is instability. These tenets hold good even today.
| Components: | Meaning: |
| Corporate Performance | Improved governance structures and processes ensure quality decision making, encourage effective succession planning for senior management and enhance long-term prosperity of companies. |
| Enhanced Investor Trust | Investors consider corporate governance as important financial performance when evaluating companies for investment. |
| Better Access to Global Market | Corporate governance systems attracts investments from global investors. |
| Combating Corruption | Companies that are transparent, provide environment where corruption would certainly fade out, makes companies more efficient and prevents malpractices. |
| Easy finance from Institutions | The credit worthiness of a company can be trusted on the basis of corporate governance practiced in the company. |
| Enhancing Enterprise Valuation | Improved management accountability and operational transparency increases the value of corporation. |
| Reduced Risk of corporate crisis and scandals | Effective corporate Governance ensures efficient risk mitigation systems in place. |
| Accountability | Good Corporate Governance practices create the environment whereby Boards cannot ignore their accountability to the stakeholders. |
Arthashastra talks self-discipline for a king and the six enemies which a king should overcome are as follows:
- Lust
- Anger
- Greed
- Conceit
- Arrogance
- Fool hardiness
In the present day context, this addresses the ethics aspect of businesses and the personal ethics of the corporate leaders.
Question 19.
Write short note on the following; CII’s desirable corporate governance code.
Answer:
CII took a special initiative on Corporate Governance, the first institution initiative in Indian Industry. The objective was to develop and promote a Code for Corporate Governance to be adopted and followed by Indian companies, whether in the Private Sector, the Public Sector, Banks or Financial Institutions, all of which are corporate entities. The final draft of the said Code was widely circulated in 1997. In April 1998, the Code was released. It was called Desirable Corporate Governance: A Code. ‘
Question 20.
“The institutional investors should use their powers and influence to ensure the implementation of the best practices set out in the Combined Code (2008)”. In the light of this statement state the observations of Kumar Mangalam Birla Committee on the principles of good corporate governance for the Institutional Shareholders in Indian scenario.
Answer:
Institutional shareholders acquire a large stake in equity share capital of the listed companies. In some of the listed companies they are the major shareholders and own shares largely on behalf of the retails shareholders. They have special responsibility given the weightage of their votes and have a bigger role to play in corporate governance. They can effectively use their powers to influence the standard of corporate governance.
The recommendations of Kumar Mangalam Birla Committee for the institutional shareholders are:
- Take active interest in the composition of the Board of Directors.
- Be vigilant.
- Maintain regular and systematic contact at senior level for exchange of views on management, strategy, performance and the quality of management.
- Ensure that voting intentions are translated into practice.
- Evaluate the corporate governance performance of the company.
Question 21.
Corporate government is still evolving in India. Trace the major principles of corporate government in India as recommended by Ku¬mar Mangalam Birla committee and N.R. Narayana Murthy committee appointed by the Securities and Exchange Board of India (SEBI).
Answer:
Following are the Principles of Corporate Governance – The aim of corporate governance principles is to align the interest of individuals and community goals, corporations and society in the following ways:
1. Transparency: Companies have to be transparent. Transparency means accurate, adequate and timely disclosure of relevant information to the stakeholders. Transparency disclosure provide information to the stakeholders that their interests are being taken care of.
2. Accountability: Chairman, Board of Directors and chief executive of the company should fulfil their accountability to the shareholders,
customers, workers, society and the government. Since they have considerable authority over company’s resources, they should accept accountability for all their decisions and actions.
3. Independence: For ethical reasons, corporate governance seems to be independent, strong and non-participatory body where all decision – making is based on business and not personal biases.
4. Reporting: Good corporate governance involve adequate reporting to shareholders, other stakeholders, for example, a company should publish quarterly, half yearly and yearly performance and opening results in newspapers. It should also report the functioning of various committees set by the Board of Directors for efficient administrations. It is important on ethical grounds of the society.
Question 22.
Write short note on the following; Task force on corporate excellence through Governance
OR
Elucidate the following; Corporate excellence through governance.
Answer:
Corporate excellence:
1. Corporate excellence refers to a transformation from the status of a good company to the status of a great company. The essence of corporate excellence is to have a competitive advantage over other firms in the industry.
2. Corporate excellence is about developing and strengthening the man-agement system and process of a company to improve performance and create value for stakeholders. Corporate governance is the one and only route to achieve corporate excellence.
3. Corporate Excellence provides a structure through which the objec-tives of a company are set and how they are achieved and monitored. Good governance practice enhances the efficiency of corporate sector and helps achieving excellence in all areas in the organization.
Task Force on Corporate Excellence through Governance 2000:
In May 2000, the Department of Company Affairs [now Ministry of Corporate Affairs (MCA)] formed a broad-based study group under the chairmanship of Dr. P. L. Sanjeev Reddy, Secretary, DCA.
The group was given the ambitious task of examining ways to “operationalise the concept of corporate excellence on a sustained basis”, so as to “sharpen India’s global competitive edge and to further develop corporate culture in the country”.
In November 2000, a Task Force on Corporate Excellence set up by the group produced a report containing a range of recommendations for raising governance standards among all companies in India such as:
- Monitoring the Performance
- Inculcate Moral Values and Principles in Business
- Fair and Equitable Treatment of Shareholders
- Transparency and Full Disclosures
- Fair and Equitable Treatment of Employees and Workers
- Strong Internal Control
- Reduce Misconduct and Frauds
- Satisfied Customers etc.
Question 23.
In year 2017, the SEBI has constituted a Committee on Corporate § Governance under the Chairmanship of Mr. Uday Kotak with the aim of improving standards of Corporate Governance of listed companies in India. List out the recommendations given by this Committee.
Answer:
The recommendations of the Committee [on Corporate Governance under the Chairmanship of Mr. Uday Kotak] were as follows:
1. Composition and Role of the Board of Directors Le. Minimum No. of Directors on a Board, Gender Diversity on Board, Attendance of Directors, Quorum for Board Meetings, Minimum No. of Board Meetings, Maximum No. of Directorships etc.
2. The Institution of Independent Directors Le. Minimum Nos. of In-dependent Directors, Eligibility Criteria for Independent Directors, Minimum compensation to Independent Directors, Lead Independent Directors, Casual vacancy of Independent Directors etc.
3. Board Committees Le. Composition and Role of Audit Committee, Nomination, Remuneration and Stakeholder Relationship Committee etc.
4. Enhanced Monitoring of Group Companies i e. Obligation on the Board of the Listed Co. with respect to subsidiaries, Secretarial Audit) etc.
5. Promoters / Controlling Shareholders and Related Party Transactions i.e. Disclosure and Approval of Related Party Transactions, Royalty and Brand Payments to
6. Related Party, Remuneration to Executive Promoters Directors and Non-Executive Directors etc.
7. Disclosures and Transparency pertaining to Submission of Annual reports, Disclosures pertaining to Credit Rating, Disclosures pertaining to Directors, Disclosures pertaining to Disqualification of Directors, Disclosures pertaining to Subsidiary Accounts, Prior Intimation of Board meeting to discuss Bonus Issue, Disclosure on Website etc.
8. Accounting and Audited related issues i e. Audit Qualifications, Independent External opinion by Auditors, Group Audits, Quarterly financial controls, Internal financial control, IND-AS adoption, Disclosure of Audit fees of Auditors etc.
9. Investors participation in Meetings of Listed Entities ie. Timeline for AGM in listed entities, E-voting and webcast of proceedings of meeting, Treasure Stock, Stewardship code).
10. Governance aspects of Public Sector Enterprises.
11. Leniency Mechanism.
12. Capacity building in SEBI for enhancing Corporate Governance in Listed Entities.
13. In its board meeting on March 27,2018, SEBI, after detailed consideration and due deliberation, accepted several recommendations of the Kotak Committee without any modifications and accepted a few other recommendations with certain modifications as to timelines for implementation, applicability thresholds among others.
Question 24.
Ebbers built World Com from a small telecommunications company into a global giant. It all started back in 1984, when he invested in a local long-distance phone company. Soon he was invited to manage it. He made it grow through a series of aggressive, even audacious mergers. Eventually, it became a publically traded corporation with annual revenues of $39 billion. As the company grew, so did Ebbers’s wealth, but his extravagant spending forced him to use all of his World.Com stock as collateral for bank loans to pay his debts.
If its price fell too far, he would be bankrupt. About this time in 1990s, the dot-com investment bubble burst.’ World- Corn’s revenue declined and expenses for its world-spanning fibre optic network rose more than anticipated. According to later investigations, in 2000, Ebbers gave the first in a string of instructions to his Chief Financial Officer to report false revenues and use accounting tricks to disguise rising expenses. The share prices held. However, internal auditors discovered the deceit and reported it to the Securities and Exchange Commission (SEC).
The agency started an investigation. WorldCom’s Board of directors forced Ebbers to resign. Soon the truth came out and WorldCom shares lost 90% of their value. In 2002, WorldCom set a record in failure, breaking Enron’s previous total for the largest bankruptcy in American history. Although the company ultimately survived, 17,000 workers lost their jobs and investors lost billions.
The purpose of Corporate Governance is to improve governance in the corporate but the story of WorldCom presented above puts a question mark on the sanctity of Corporate Governance.
Analyse the failure of Corporate Governance and give recommendations to keep future company operations in order and avoid others from fol¬lowing the footsteps of Ebbers even though he was forced by the Board of directors to resign.
Answer:
Facts:
Worldcom failure is one of the largest bankruptcy cases in American history, breaking even Enron’s record. Ebbers invested in a local long-distance phone company in 1984, which he was invited to manage later. He made it grow into a global giant through a series of mergers. Ebbers played a major role in the fraud. His extravagant spending forced him to take massive amount of bank loans by securing his Worldcom shares.
When telecom industry was experiencing a down turn, at the same time Worldcom stock prices also started falling. In order to avoid margin call he needed company’s stock to perform well. Ebbers used unethical means to keep the company’s stock price up. The fraud was directed by Ebbers and it was implemented through his CFO by reporting false revenues and using accounting tricks to disguise rising expenses. It came out when internal auditors discovered the deficit and reported the same to SEC.
Causes of Failure:
There were major corporate governance failures in Worldcom which, mainly, were:
- Internal control failure
- Ineffective board
- Lack of transparency
Recommendations to keep future company operations in order and avoid others from following the footsteps of Ebbers:
1. An Active, Informed and Independent Board:
A very high standard is required for the appointment of independent directors who should have adequate experience and qualification. With the exception of the CEO, majority of the members of the board must be fully independent.
2. A Non-Executive Chairman of the Board of Directors:
This recommendation requires every company to create the position of non-executive chairman of the board. The non-ex-ecutive chairman shall have defined responsibilities relating to co-ordinating the board’s work, chairing meetings, coordinating with committee chairs, organizing CEO and board performance reviews, and similar issues. The non-executive chairman shall not be involved in the, day to day management duties.
The CEO remains fully responsible for all management decisions, subject to board oversight. The clear separation of the role of Chairman and CEO between two persons will maintain the balance of power and the CEO will be guided & reviewed, by the Board.
3. Independent Director:
An independent director shall hold office for a term up to five years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company for another five years. This recommendation will ensure the independence of Independent Director.
4. Active Board Committees:
This recommendation prescribes that every company shall constitute an Audit Committee, Governance Committee, Nomination and Remuneration Committee and a Risk Management Committee. The CEO shall not serve as a member of any of these committees, so that each committee is composed entirely of independent directors.
5. Auditor Independence:
The statutory auditor shall be appointed for a maximum period of 10 years which will ensure the audit quality. An auditor shall provide to the company only such services as are approved by the Board of Directors or the audit committee, which shall not include non audit services. This recommendation will ensure the independence of statutory auditor.
6. Compensation Limits:
The Nomination and Remuneration Committee shall establish a maximum compensation level for any individual in any year without shareholder approval. A substantial part of the compensation shall not be linked to the share price, as this leads to the manipulation of the financial statements by the top management of the company to secure their own remuneration.
7. Enhanced Transparency, Internal Controls and Finance Department:
The recommendations suggest that the Company should intensify efforts to develop disclosure practices that will result in transparency of financial information beyond legal requirements.
Question 25.
Explain the theories which form the basis of evolution of corporates governance?
Answer:
Following theories elucidate the basis of evolution of corporate governance:
Agency Theory:
According to this theory, managers act as ‘Agents’ of the corporation. The owners set the central objectives of the corporation. Managers are responsible for carrying out these objectives in day-to-day work of the company. Corporate Governance is control of management through designing the structures and processes. In agency theory, the owners are the principals. But principals may not have knowledge or skill for getting the objectives executed. Thus, principal authorizes the mangers to act as ‘Agents’ and a contract between principal and agent is made.
Shareholder Theory:
According to this theory, it is the corporation which is considered as the property of shareholders. They can dispose off this property as they like. They want to get maximum return from this property. The owners seek a return on their investment and that is why they invest in a corporation. The directors are responsible for any damage or harm done to their property i.e., the corporation. The role of managers is to maximise the wealth of the shareholders.
Stakeholder Theory:
According to this theory, the company is seen as an input-output model and all the interest groups which include creditors, employees, customers, suppliers, local-community and the government are to be considered. From their point of view, a corporation exists for them and not the shareholders alone.
Stewardship Theory:
The word ‘steward’ means a person who manages another’s property or estate. Here, the word is used in the sense of guardian in relation to a corporation (this theory is value based). The managers and em-ployees are to safeguard the resources of corporation and its property and interest when the owner is absent. They are like a caretaker. They have to take utmost care of the corporation. They should not use the property for their selfish ends. This theory thus makes use of the social approach to human nature.
Question 26.
Elucidate the Central Principles by The ASX Corporate Governance Council.
Answer:
Following principles are laid down by the ASX Corporate Governance Council:
1. Lay solid foundations for management and oversight : A listed entity should clearly delineate the respective roles and responsibilities of its board and management and regularly review their performance.
2. Structure the board to be effective and add value : The board of a listed entity should be of an appropriate size and collectively have the skills, commitment and knowledge of the entity and the industry in which it operates, to enable it to discharge its duties effectively and to add value.
3. Instill a culture of acting lawfully, ethically and responsibly : A listed entity should instill and continually reinforce a culture across the organisation of acting lawfully, ethically and responsibly,
4. Safeguard the integrity of corporate reports : A listed entity should have appropriate processes to verify the integrity of its corporate reports.
5. Make timely and balanced disclosure : A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities.
6. Respect the rights of security holders : A listed entity should provide its security holders with appropriate information and facilities to allow them to exercise their rights as security holders effectively.
7. Recognise and manage risk : A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework.
8. Remunerate fairly and responsibly : A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders and with the entity’s values and risk appetite.