Corporate Governance and Ethics

• Corporate Governance refers to the system of rules, practices, and processes by which a company is directed and controlled.
• Governance is closely related to ethics.
• Ethics, as defined by the Oxford Dictionary are the moral principles that govern a person's behavior or the conducting of an activity.

Why Corporate Governance?

• Corporate Governance is needed to improve minority shareholder rights protection
• Corporate Governance is needed to improve the firm’s transparency
• Management should run the company in the best interest of all stakeholders, especially shareholders

Who are these Ethics applicable to?

• The ethics of Corporate Governance apply to listed companies

Why was Corporate Governance mandated?

• Secondary market scams were the reason Corporate Governance was mandated.
• Pre Y2K scams include:
  • Harshad Mehta scam – year 1992
  • NBFC Companies Scam- year 1995-1998
  • CRB Finance and Mutual Funds Scam of Year 1995-1997
  • Plantation's Company scam- year 1997-1999
  • Vanishing Company's Scam year 1995-1999
  • Name Changing Scam year 1999-2000
  • Dot Com. Company Scam year 1999 2000
  • US-64 Disaster "Gadbud” of year 1997-1998
  • Ketan parekh Scam year 1999 2001
  • UTI Fiasco "Gadbad" year 1994 2000

Effects of Corporate Governance

• Corporate Governance aims to promote transparency in work.
• Corporate Governance aims to restore faith of Stake holders and share holders.

Mandatory Disclosure of Corporate Governance

• Mandatory Disclosures include:
  • Board of Directors
  • Audit Committee
  • Subsidiary Companies
  • Disclosures
  • CEO/CFO Certification
  • Report of Corporate Governance
• Compliance

Board of Directors

• The Board of directors consists of :
  • Executive members
  • Non-Executive members
    • Independent members
    • Non-Independent members

Non-Executive Director Criteria

• To be an Independent Director, the person should meet certain criteria
  • There should be no pecuniary material relationship with Company, Promoters, Directors, Senior Management, Holding, subsidiary or associate Company
  • The Director should not be a relative of any of the other Directors
  • The Director should not be an employee or partner of audit or legal firm with vested pecuniary interest in the past 3 years
  • Should not be a substantial shareholder i.e., not more than 2% shareholding
  • Should not be less than 21 years old

Strength of Board

• If Chairman is Non - Executive Director, then at least 1/3 of Directors should be Independent Directors
• If Chairman is Executive Director, then at least 1/2 the Directors should be Independent Directors
• If Chairman is Non - Executive promoter Director, then at least 1/2 the Directors of the Board should be Independent Directors

Board Meeting Details

• The board should meet four times a year.
• There should be a maximum gap of Four Months only between meetings.
• A member cannot be on more than 10 Committees and cannot be Chairman of more than 5 committees
• The board should draft a code of conduct for board members and senior management
• The Code of Conduct should be made available and posted on the company website.
• Information to be made available to the Board should be as per Annexure I A.

Audit Committee

• The Audit Committee is a sub-committee of the board
• The members of the Audit Committee should be financially literate
• The Chairman of the Audit Committee should be independent
• The Company Secretary should be the Secretary of the Audit Committee
• The Audit Committee should meet four times a year with a maximum gap of four months between meetings

Powers and Role of Audit Committee

• Audit Committees overview and approve Financial Statements on a quarterly and annual basis.
• The Audit Committee reviews company performance.
• The Committee appoints and re-appoints Statutory and Internal Auditors
• The Committee approves appointment of CFO

Subsidiary Companies

• Concerning "Material Non-Listed Indian Subsidiaries"
• At least one independent director of Holding company to be in subsidiary company.
• The Audit Committee of Holding company reviews the financials of the Subsidiary company.
• Minutes of Subsidiary meetings are to be placed before Board of Holding Listed company.

Disclosures

• Mandatory Disclosures include:
  • Basis of Related Party Transactions
  • Disclosure of Accounting Treatment
  • Board Disclosure – Risk Management
  • Proceeds from Public, Rights, Preferential Issues
  • Remuneration of Directors
  • Management
  • Shareholder

CEO/CFO Certification

• The CEO- Managing Director and CFO – Director/Head of Finance must submit a certificate to the Board that includes the following:
  • Review of financials statements and a statement that it contains no untrue or misleading information.
  • A statement that Financial Statements present true and fair view.
  • A statement that accepts responsibility for establishing and maintaining Internal control for financial reporting and rectifying deficiencies, if any.

Report on Corporate Governance

• Annual Report should contain a separate section on Corporate Governance with detailed compliance report
• Quarterly Compliance certificate should be submitted to Stock Exchange.

Compliance

• A Certificate from either the Auditor or a Practicing Company Secretary on compliance of conditions of corporate Governance should form part of Directors Report.
• There should be a disclosure of certain non-mandatory provisions in this clause,which can be implemented at the discretion of the Company.

Corporate Governance encompasses rules, practices, and processes for company direction and control. It improves shareholder rights protection and firm transparency. Ethics in corporate governance, applicable to listed companies, ensures management acts in the best interest of all stakeholders.