Corporate Governance An Insight In Committee Report On Corporate Governance By Naresh Chandra, Retired IAS (Padma Vibhushan)
Corporate Governance Corporate governance is the the set set of pr proce ocesse sses, s, cu cust stoms oms,, pol polici icies, es, la laws ws,, and institu institutions tions aff affecting ecting the way way a corpor corporation ation is directed, directed, adminis administered tered or controlled.
Corporate governance also includes the relationships among the many man y stak stakeholder eholderss inv involved olved and the goals goals for which the corporation corporation is governed. An important theme of corporate governance is to ensure the accountability of certain individuals in an organization organization through mechanisms mechan isms that try to reduce or eliminate the princip principal-ag al-agent ent problem.
Evolution:
Corporate Governance
History records Pataliputra, Pataliputra, the capital of the Mauryan Empire, as a city astonisningly well organized and administered according to the best principles of governance Writing about the ideal conduct of the king, king , Kautilya, an official says an ideal king is one for whomIn the happiness & well being of the subjects, is the well being of the king, In the welfare of the subjects, lies the welfare of the king, What is desirable and beneficial to the subjects and not his personal desires and ambitions is desirable and beneficial beneficial to the king king (English Translation Translation from the Sanskrit version of Arthasastra) Kautilya elaborates elaborates on the fourfold duty of a king asRaksha or protection p rotection Vruddi or enhancement Palana or maintenance the substitution of the sate with the company company,, the king with the CEO or the Board of the company and the subjects with the shareholders, brings out the sprit of the corporate governance.
So, the fourfold duties of the King/ C EO/ Board of a company can be interpreted to implyRaksha or protection
Sharehol Shareholder derss wealth wealth
Vruddi or enhancement
Wealt ealth h thr thro ough ugh pr proper oper utilization of assets
Palana or maintenance
Of tha thatt wealt wealth h
Yogaksh ogakshema ema or safeguard
Interest Interest of shareholder shareholderss
Naresh Chandr Chandra a
Naresh Chandra (b.
1934) is an Indian Indian Civil Servant Servant who has served served as the Cabinet Secretary (1990-92) and the Indian Ambassador to the US (1996-2001). He was awarded awarded the Padma Padma Vibhushan Vibhushan for his service, in 2007.
INTRODUCTION CR reforms came into prominence for the first time after the south east and east asian crisis c risis of 1997-98 India has not faced the CG crisis like other major Asian economics Listed companies in india follow strict CG rules. Enron
debacle of 2001 triggered another phase of reforms in the US.
Naresh Mehta Mehta committee was setup by ministry of finance in 2002. Major objectives of this committee are: statutory auditor- company relations relations hip, so as to furt her strengthen the professional nature of The statutory this interface The need, if any, for rotation of statutory audit firms or partners The procedure for appointment of auditors and determinations of audit fees. Restrictions, if necessary, on non audit fees Independence of auditing functions.
Recommendations in chapter 2 : The auditor -company Relationship
2.1: Disqualifications for audit assignments ±
2.2: List of prohibited non-audit services ±
In line with international best practices, practices, the committee recommends an abbreviated list of disqualification disqualifica tion for auditing aud iting assignments. The committee recommends recommends services which should not be provided by an audit firm to any audit clients.
2.3: Independence Independe nce standards standards for consulting and other entities that are affiliated to audit firms. 2.4: Compulsory Audit partner rotation rotation
Recommendations in chapter 2 : the auditor -company Relationship 2.5: Auditors disclosure of contingent liabilities. 2.6: Auditors disclosure of qualifications and consequent action 2.7: Managements certification in the event of auditors replacements 2.8: Auditors annual certification of independence 2.9: Appointment of auditors 2.10: CEO and CFO certification of annual audited accounts.
Recommendations in chapter 3 : Auditing the auditors 3.1: Setting up of indepencent Quality review Board 3.2: Proposed disciplinary mechanism for auditors
Procedure for dealing with complaint cases Disciplinary Disciplinary commit committee tee Council Council Appella Appellate te body body Publication of decision of the Disciplinary committee committee Fund Fundin ing g
Recommendations in chapter 4 : Independent Directors 4.1: Defining an Independent director
4.2: Percentage of Independent Director D irectorss
4.3: Minimum Board size of listed companies
4.4: Disclosure on duration of Board meeting/committ meeting /committee ee meeting
o material relationship relationsh ip ith company, company, its promoters or management
o less than 50% of directors directors should be independent
Minimum size of 7 ith at least 4 independent directors directors
Recommendations in chapter 4 : Independent Directors 4.5: Teleconferencing and video conferencing
4.6: Additional disclosure to directors
4.7: Independent directors on
audit committees of listed companies
4.8: Audit committee charter
Director Directorss can attend attend proceedin proceedings gs through through video conferencing if physical attendance is not possible All comp company any press press releases releases should should be be presented to the board members
Recommendations in chapter 4 : Independent Directors 4.9: Remuneration of non-executive directors
Review of statutory statutory limit on sitting fees fees No revision required on current provisions on stock stock option and 1% commission on net profits
4.10: Exempting nonexecutive directors from certain liabilities
4.11: Training of independent directors
DCA should encourage prominent institution to conduct regular training programs for independent directors independent independ ent directors should attend at least least one such course before assuming responsibilities A trainee appraisal system should be used to to judge quality of programs.
Recommendations in chapter 5 : Other Recommendations
5.1: SEBI and Subordinat Subordinate e Legislation 5.2: Improving facilities in DCA offices 5.3: Corporate Serious Fraud offices ±
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Rationalization of penalties Disqualification for serious offences Strengthening of DCA DCAss prosecution wing Managers/Promoterss to be held personally Managers/Promoter pe rsonally liable when found guilty of offences Consolidated Financial Statements to be made mandatory for companies having subsidiaries
Recommendations in chapter 5 : Other Recommendations
5.5:
5.6:
Create a system system of Pre-certification Pre-certification by company secretaries secretaries Amend Companies Act to allow DCA TO TO conduct compliance compliance audits
MAOCARO should be amended amended so that Auditors report report contain violations Introduce a system system random scrutiny scrutiny of audited accounts as is done by the Accounting Foundation in the UK Allow companies to establish establish an internal Code of Ethics DCA should sponsor research on corporate corporate governance
