Corporate Governance
Meaning
Corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company
Corporate governance therefore calls for three factors:
a) Transparency in decision-making
b) Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and
c) The accountability is for the safeguarding the interests of the stakeholders and the investors in the organisation
Need for corporate governance
In the Indian context, the need for corporate governance has been highlighted because of the scams we have been having almost as an annual feature ever since we had liberalisation from 1991. We had the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. In the Indian corporate scene we must be able to induct global standards so that at least while the scope for scams may still exist, we can reduce the scope to the minimum.
Recommendations of Kumar Mangalam Birla committee
Independent directors
The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with fifty percent of the board comprising the non-executive directors. The number of independent directors would depend on the nature of the chairman of the board. In case of a non-executive chairman, at least one-third of board should comprise of independent directors and in case of an executive chairman, at least half of board should be independent. This is a mandatory recommendation
Nominee Directors
The Committee recommends that the financial institutions should have no direct role in managing the company, and should normally not have nominees on the board, merely by virtue of their financial exposure by way of investment in the securities of a company. There is however a case for the term lending institutions to have nominees on the Boards of the borrower companies, to protect their interests as creditors, in case of loan default or a potential of loan default, the determination of which may be left to the judgement of the lending institutions themselves. In such cases, the nominee directors should take an active interest in the activities of the board and have to assume equal responsibility, as any other director in the board.
Chairman of the Board
The Committee recommends that a non-executive Chairman should be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties. This will enable him to discharge the responsibilities effectively. This is a mandatory recommendation.
Audit Committee
The Committee recommends that a qualified and independent audit committee should be set up by the board of a company. This would go a long way in enhancing the credibility of the financial disclosures of a company and promoting transparency. This is a mandatory recommendation.
Being a committee of the board, the audit committee derives its powers from the authorisation of the board. The Committee recommends that such powers should include: • To investigate any activity within its terms of reference. • To seek information from any employee. • To obtain outside legal or other professional advice. • To secure attendance of outsiders with relevant expertise, if it considers necessary. This is a mandatory recommendation.
Remuneration Committee of the Board
The Committee recommends that the board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. The remuneration committee should be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.
Disclosures of Remuneration Package
It is important for the shareholders to be informed of the remuneration of the directors of the company.
The Committee therefore recommends that the following disclosures should be made in the section on corporate governance of the annual report:
• All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension etc. • Details of fixed component and performance linked incentives, along with the performance criteria. • Service contracts, notice period, severance fees. • Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable. This recommendation is mandatory
Board Procedures
The Committee recommends that board meetings should be held at least four times in a year, with a maximum time gap of four months between any two meetings.
The Committee further recommends that to ensure that the members of the board give due importance and commitment to the meetings of the board and its committees, there should be a ceiling on the maximum number of committees across all companies in which a director could be a member or act as chairman.
The Committee recommends that a director should 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
Accounting Standards and Financial Reporting
Consolidation of Accounts of subsidiaries
Segment reporting where a company has multiple lines of business.
Disclosure and treatment of related party transactions.
Treatment of deferred taxation.
Management
In the view of the Committee, the over-riding aim of management is to maximize shareholder value without being detrimental to the interests of other stakeholders. The management however, is subservient to the board of directors and must operate within the boundaries and the policy framework laid down by the board. While the board is responsible for ensuring that the principles of corporate governance are adhered to and enforced, the real onus of implementation lies with the management. It is responsible for translating into action, the policies and strategies of the board and implementing its directives to achieve corporate objectives of the company framed by the board. The Committee therefore recommends that the board should clearly define the role of the management.
Good corporate governance casts an obligation on the management in respect of disclosures. The Committee therefore recommends that disclosures must be made by the management to the board relating to all material, financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.
Shareholders
The Committee recommends that in case of the appointment of a new director or re-appointment of a director a shareholder must be provided with the following information: • A brief resume of the director; • Expertise in specific functional areas; and • Names of companies in which the person also holds the directorship and the membership of Committees of the board.
The Committee therefore recommends that as shareholders have a right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes, they should not only be provided information as under the Companies Act, but also in respect of other decisions relating to material changes such as takeovers, sale of assets or divisions of the company, changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership
The Committee recommends that information like quarterly results, presentation made by companies to analysts may be put on company’s web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six-months, should be sent to each household of shareholders.
Institutional shareholders
The Committee recommends that the institutional shareholders:
• 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.
Steps to improve Corporate governance
1) The Sick Industries Companies Act (SICA) has become so convenient for the unscrupulous managements that we find in our country industries become sick, the industrialist do not become sick. BIFR has also been called the Bureau of Industrial Funeral Rites! It is high time we scrap the entire system. This will mean the abolition of SICA and organisations like BIFR there under. Mere change in the system by making amendments is not going to improve the situation.
2) The entire banking system and the Banking Secrecy Act call for a review. Our banking system is such that if you borrow one lakh of rupees, you are afraid of the bank but if you borrow ten crores of rupees, the bank is afraid of you. With the amount of NPA continuously rising, it is high time that we amend the Banking Secrecy Act to reveal those who are willful defaulters.It is high time that practice of disclosing the name of willful defaulters must be made more practical and timely.
3)Laws like the Benami Transactions Prohibition Act and the Prevention of Money Laundering Act should be implemented effectively and vigorously. Agencies like the CVC can be used to ensure that corrupt practices are effectively punished because it is the atmosphere, which encourages proper corporate behaviour. In India today we have a system where the level of public governance is very poor. There is no fear of punishment at all. In such a situation it is only a saint who will be strictly observing the rules of corporate governance.
Directors Value Added
Market Value Added is the best measure of wealth created in a company over the years. It is the excess of the company's market value over the invested debt and equity capital. It is calculated by the formula:
MVA = Market value of Equity (market capitalisation) + Market value of Debt - Book Value of Equity - Book Value of Debt
The analogy here is that of mutual funds. A director is a fiduciary trustee, to whom shareholders have entrusted their wealth. It is his duty to ensure that such wealth keeps growing. This would be achieved if the MVA is positive and growing. If a director sits on the boards of more than one company, we aggregate the MVAs, resulting in the definition of Director Value Added, or DirVA, which is defined as follows:
DirVA = Aggregate (Market Value of Equity +Market Value of Debt- Book Value of Equity- Book Value of debt)
The aggregates are across all companies on whose boards a Director sits (as independent and non-independent). Each Director will have a DirVA value to his credit, which changes every year, depending on the performances of the companies under his directorship.
For instance, Mr X sits on the boards of 10 companies - including Hindustan Lever, GlaxoSmithKline, Nicholas Piramal, Sundram Fastners and Ucal Fuel. The aggregate MVA of all these companies, or the DirVA of Narayanan stood at Rs. 35,678 crores as on 30th June, 2003. This makes Mr X one of the priciest independent directors in the country.
Parameters of DVA
Director Independence
This is an important parameter on which the ratings of a Director depend. For true independence, it is necessary that a Director is not sitting on the boards of too few companies, nor on the boards of companies controlled by the same industrial house.
Number of Companies (NOC)
The number of companies under directorship, which are considered for the calculation of DirVA.
Number of Houses (NOHS)
This is the total number of industrial houses (Tatas, Singhanias etc), under whose control the companies under directorship fall. This number will be equal to or less than NOC. It will be less than NOC if one or more companies are controlled by the same industrial house.
A highly rated director could lose out over a period of time if all his companies continue to under-perform the market. Others down the rung could overtake him, if their companies keep out-performing. It is a level playing ground there. And an unforgiving one too.
Wealth creation for shareholders
Calling corporate governance anything other than wealth creation for shareholders is incomplete at best, hypocrytic at worst. Because, no one can end up creating wealth for shareholders unless all other 'stakeholders' have first been taken care of. If employees are not paid properly, either they will leave, or the unions will go for the jugular. If taxes are not paid, revenue collectors will lock up the company premises. Fool around with the bankers, and they will call in the auctioneers. Only if all these 'stakeholders' are first taken care of, will there be wealth left (rather they will let wealth remain) for shareholders to enjoy.
Conversely, if shareholder's wealth keeps enhancing, our contention is that justice has already been done to all other stakeholders. So the market capitalisation of a company is, in our view, the prime measure of good corporate governance. Any independent director who has been instrumental in the growth of market capitalisation in one or more companies, can thus be acclaimed to be a good corporate governor.
A CHECKLIST FOR GOOD CORPORATE GOVERNANCE
1) Statutory Accountability
Whether the board has established effective arrangements to ensure compliance with all applicable regulations, and
Other Relevant Statements of Best Practice ?
2) Accountability for Public Money
Whether the board has established arrangements to ensure that public funds are
** Properly safeguarded?
** Used economically, efficiently and effectively?
** Used in accordance with the statutory or other authorities
that Governs their use ?
3) Communication with Stakeholders
Whether the board has established established:
*Clear channels of communication
with the body’s stakeholders?
Appropriate processes to ensure that such channels
operate effectively in practice?
4) Has the board made an explicit commitment to openness in all the activities of the body?
5) Does the board:
* Report publicly the processes for making appointments to the board?
* Make publicly available the names of all board members, together with their relevant other interests
6) Roles and Responsibilities
*Is there a clearly defined division of responsibilities at the head of the body?
7) Does the board:
*** Meet regularly?
* * Retain full and effective control over the body?
* Monitor the executive management
8) Has the board established a framework of strategic control (or scheme of delegated or reserved powers)
9) Does the framework of strategic control include a formal schedule of those matters specifically reserved for the collective decision of the board? **
10) Does the board maintain the framework of strategic control up to date?
11)Has the board established clearly documented and understood management processes for:
*** Policy development, implementation and review?
*** Decision-making, monitoring, control and reporting?
12) Has the board established formal procedural and financial regulations to govern the conduct of its business?
*13) Has the board established appropriate arrangements to ensure that it has access to all such relevant information, advice and resources as is necessary to enable it to carry out its role effectively?
*
14) Where the body is responsible for making appointments to the board, has it established a formal process to ensure that such appointments are made:
* In accordance with specified criteria?
* On the basis of merit and the individual’s ability to carry out a defined role within the organisation?
15) Where the body is responsible for making appointments to the board, are such appointments dealt with by the board as a whole?
16) Is the role of the chairman formally defined in writing?
*
17) Are non-executive board members:
** Independent of management?
** Free from any other relationships which may materially interfere with exercising an independent judgement on issues of strategy, performance, resources and standards of conduct?
*
18) Are the duties, terms of office, remuneration and its review of non-executive board members defined clearly?
19) Where the body is responsible for making appointments of non-executives to the board:
Are appointments for a fixed term?
*Are appointments subject to a formal appraisal process?
20) Does the chief executive have line responsibility for all aspects of executive management?
21) Is he or she accountable to the board for the ultimate performance and implementation of the board’s policy?
*
22) Has the board made a senior executive responsible for ensuring that appropriate advice is given to it on all financial matters?
23) Has the board made a senior executive responsible for ensuring that board procedures are followed and that all applicable statutes and regulations, and other relevant statements of best practice are complied with?
24) Has the board established a remuneration committee to make recommendations on the remuneration of top executives?
FINANCIAL REPORTING AND INTERNAL CONTROLS
Financial Reporting
25) Annual Reporting
*Does the board publish on a timely basis an objective, balanced and understandable annual report?
26) Does the board include in its annual report a statement explaining its responsibility for the body’s accounts?
*
27) Does the board include in its annual report a statement confirming that it has complied with relevant standards or codes of corporate governance?
*Internal Controls
28) Has the board taken steps to ensure that systems of internal control:
Are established?
Continue to operate in practice?
29) Does the board include in its annual report a statement on the effectiveness of the body’s systems of internal control?
30) Has the board taken steps to ensure that effective systems
of risk management are established as part of the systems of internal control?
31) Has the board taken steps to ensure that an effective internal audit function is established as part of the systems of internal control?
32) *Has the board established an audit committee with responsibility for the independent review of the systems of internal control and the external audit process?
External Auditors
33) Has the board taken steps to ensure that an objective and professional relationship is maintained with the external auditors?
STANDARDS OF BEHAVIOUR
Leadership
34) Has the board taken steps to ensure that its members exercise leadership by conducting themselves in accordance with high standards of personal behaviour?
Code of Conduct
35) Has the board developed a formal code of conduct defining the standards
of personal behaviour, to which individual board members and all employees of the body are required to subscribe?
36) *Has the board established appropriate mechanisms to ensure that members and employees of the body are not influence by prejudice, bias or conflicts of interest?
The problem in India is that there is a feeling that violators first may not be detected and even if detected, they can get away very easily. We will therefore have to focus very effectively on creating proper public governance and making changes in the various regulations impinging on the working of an enterprise or a body like the capital market, if we want to usher in an era of better corporate governance in the country.
Ultimately, corporate governance is the net result of the individual sense of values, the values held in society or part of a society like professional bodies or business associations and finally the system of public governance. If those who violate the norms are effectively punished then there is a fear and there will be adherence of the principles of corporate governance.
Meaning
Corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company
Corporate governance therefore calls for three factors:
a) Transparency in decision-making
b) Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken, and
c) The accountability is for the safeguarding the interests of the stakeholders and the investors in the organisation
Need for corporate governance
In the Indian context, the need for corporate governance has been highlighted because of the scams we have been having almost as an annual feature ever since we had liberalisation from 1991. We had the Harshad Mehta Scam, Ketan Parikh Scam, UTI Scam, Vanishing Company Scam, Bhansali Scam and so on. In the Indian corporate scene we must be able to induct global standards so that at least while the scope for scams may still exist, we can reduce the scope to the minimum.
Recommendations of Kumar Mangalam Birla committee
Independent directors
The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with fifty percent of the board comprising the non-executive directors. The number of independent directors would depend on the nature of the chairman of the board. In case of a non-executive chairman, at least one-third of board should comprise of independent directors and in case of an executive chairman, at least half of board should be independent. This is a mandatory recommendation
Nominee Directors
The Committee recommends that the financial institutions should have no direct role in managing the company, and should normally not have nominees on the board, merely by virtue of their financial exposure by way of investment in the securities of a company. There is however a case for the term lending institutions to have nominees on the Boards of the borrower companies, to protect their interests as creditors, in case of loan default or a potential of loan default, the determination of which may be left to the judgement of the lending institutions themselves. In such cases, the nominee directors should take an active interest in the activities of the board and have to assume equal responsibility, as any other director in the board.
Chairman of the Board
The Committee recommends that a non-executive Chairman should be entitled to maintain a Chairman’s office at the company’s expense and also allowed reimbursement of expenses incurred in performance of his duties. This will enable him to discharge the responsibilities effectively. This is a mandatory recommendation.
Audit Committee
The Committee recommends that a qualified and independent audit committee should be set up by the board of a company. This would go a long way in enhancing the credibility of the financial disclosures of a company and promoting transparency. This is a mandatory recommendation.
Being a committee of the board, the audit committee derives its powers from the authorisation of the board. The Committee recommends that such powers should include: • To investigate any activity within its terms of reference. • To seek information from any employee. • To obtain outside legal or other professional advice. • To secure attendance of outsiders with relevant expertise, if it considers necessary. This is a mandatory recommendation.
Remuneration Committee of the Board
The Committee recommends that the board should set up a remuneration committee to determine on their behalf and on behalf of the shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for executive directors including pension rights and any compensation payment. The remuneration committee should be in a position to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.
Disclosures of Remuneration Package
It is important for the shareholders to be informed of the remuneration of the directors of the company.
The Committee therefore recommends that the following disclosures should be made in the section on corporate governance of the annual report:
• All elements of remuneration package of all the directors i.e. salary, benefits, bonuses, stock options, pension etc. • Details of fixed component and performance linked incentives, along with the performance criteria. • Service contracts, notice period, severance fees. • Stock option details, if any – and whether issued at a discount as well as the period over which accrued and over which exercisable. This recommendation is mandatory
Board Procedures
The Committee recommends that board meetings should be held at least four times in a year, with a maximum time gap of four months between any two meetings.
The Committee further recommends that to ensure that the members of the board give due importance and commitment to the meetings of the board and its committees, there should be a ceiling on the maximum number of committees across all companies in which a director could be a member or act as chairman.
The Committee recommends that a director should 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
Accounting Standards and Financial Reporting
Consolidation of Accounts of subsidiaries
Segment reporting where a company has multiple lines of business.
Disclosure and treatment of related party transactions.
Treatment of deferred taxation.
Management
In the view of the Committee, the over-riding aim of management is to maximize shareholder value without being detrimental to the interests of other stakeholders. The management however, is subservient to the board of directors and must operate within the boundaries and the policy framework laid down by the board. While the board is responsible for ensuring that the principles of corporate governance are adhered to and enforced, the real onus of implementation lies with the management. It is responsible for translating into action, the policies and strategies of the board and implementing its directives to achieve corporate objectives of the company framed by the board. The Committee therefore recommends that the board should clearly define the role of the management.
Good corporate governance casts an obligation on the management in respect of disclosures. The Committee therefore recommends that disclosures must be made by the management to the board relating to all material, financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.
Shareholders
The Committee recommends that in case of the appointment of a new director or re-appointment of a director a shareholder must be provided with the following information: • A brief resume of the director; • Expertise in specific functional areas; and • Names of companies in which the person also holds the directorship and the membership of Committees of the board.
The Committee therefore recommends that as shareholders have a right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes, they should not only be provided information as under the Companies Act, but also in respect of other decisions relating to material changes such as takeovers, sale of assets or divisions of the company, changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership
The Committee recommends that information like quarterly results, presentation made by companies to analysts may be put on company’s web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six-months, should be sent to each household of shareholders.
Institutional shareholders
The Committee recommends that the institutional shareholders:
• 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.
Steps to improve Corporate governance
1) The Sick Industries Companies Act (SICA) has become so convenient for the unscrupulous managements that we find in our country industries become sick, the industrialist do not become sick. BIFR has also been called the Bureau of Industrial Funeral Rites! It is high time we scrap the entire system. This will mean the abolition of SICA and organisations like BIFR there under. Mere change in the system by making amendments is not going to improve the situation.
2) The entire banking system and the Banking Secrecy Act call for a review. Our banking system is such that if you borrow one lakh of rupees, you are afraid of the bank but if you borrow ten crores of rupees, the bank is afraid of you. With the amount of NPA continuously rising, it is high time that we amend the Banking Secrecy Act to reveal those who are willful defaulters.It is high time that practice of disclosing the name of willful defaulters must be made more practical and timely.
3)Laws like the Benami Transactions Prohibition Act and the Prevention of Money Laundering Act should be implemented effectively and vigorously. Agencies like the CVC can be used to ensure that corrupt practices are effectively punished because it is the atmosphere, which encourages proper corporate behaviour. In India today we have a system where the level of public governance is very poor. There is no fear of punishment at all. In such a situation it is only a saint who will be strictly observing the rules of corporate governance.
Directors Value Added
Market Value Added is the best measure of wealth created in a company over the years. It is the excess of the company's market value over the invested debt and equity capital. It is calculated by the formula:
MVA = Market value of Equity (market capitalisation) + Market value of Debt - Book Value of Equity - Book Value of Debt
The analogy here is that of mutual funds. A director is a fiduciary trustee, to whom shareholders have entrusted their wealth. It is his duty to ensure that such wealth keeps growing. This would be achieved if the MVA is positive and growing. If a director sits on the boards of more than one company, we aggregate the MVAs, resulting in the definition of Director Value Added, or DirVA, which is defined as follows:
DirVA = Aggregate (Market Value of Equity +Market Value of Debt- Book Value of Equity- Book Value of debt)
The aggregates are across all companies on whose boards a Director sits (as independent and non-independent). Each Director will have a DirVA value to his credit, which changes every year, depending on the performances of the companies under his directorship.
For instance, Mr X sits on the boards of 10 companies - including Hindustan Lever, GlaxoSmithKline, Nicholas Piramal, Sundram Fastners and Ucal Fuel. The aggregate MVA of all these companies, or the DirVA of Narayanan stood at Rs. 35,678 crores as on 30th June, 2003. This makes Mr X one of the priciest independent directors in the country.
Parameters of DVA
Director Independence
This is an important parameter on which the ratings of a Director depend. For true independence, it is necessary that a Director is not sitting on the boards of too few companies, nor on the boards of companies controlled by the same industrial house.
Number of Companies (NOC)
The number of companies under directorship, which are considered for the calculation of DirVA.
Number of Houses (NOHS)
This is the total number of industrial houses (Tatas, Singhanias etc), under whose control the companies under directorship fall. This number will be equal to or less than NOC. It will be less than NOC if one or more companies are controlled by the same industrial house.
A highly rated director could lose out over a period of time if all his companies continue to under-perform the market. Others down the rung could overtake him, if their companies keep out-performing. It is a level playing ground there. And an unforgiving one too.
Wealth creation for shareholders
Calling corporate governance anything other than wealth creation for shareholders is incomplete at best, hypocrytic at worst. Because, no one can end up creating wealth for shareholders unless all other 'stakeholders' have first been taken care of. If employees are not paid properly, either they will leave, or the unions will go for the jugular. If taxes are not paid, revenue collectors will lock up the company premises. Fool around with the bankers, and they will call in the auctioneers. Only if all these 'stakeholders' are first taken care of, will there be wealth left (rather they will let wealth remain) for shareholders to enjoy.
Conversely, if shareholder's wealth keeps enhancing, our contention is that justice has already been done to all other stakeholders. So the market capitalisation of a company is, in our view, the prime measure of good corporate governance. Any independent director who has been instrumental in the growth of market capitalisation in one or more companies, can thus be acclaimed to be a good corporate governor.
A CHECKLIST FOR GOOD CORPORATE GOVERNANCE
1) Statutory Accountability
Whether the board has established effective arrangements to ensure compliance with all applicable regulations, and
Other Relevant Statements of Best Practice ?
2) Accountability for Public Money
Whether the board has established arrangements to ensure that public funds are
** Properly safeguarded?
** Used economically, efficiently and effectively?
** Used in accordance with the statutory or other authorities
that Governs their use ?
3) Communication with Stakeholders
Whether the board has established established:
*Clear channels of communication
with the body’s stakeholders?
Appropriate processes to ensure that such channels
operate effectively in practice?
4) Has the board made an explicit commitment to openness in all the activities of the body?
5) Does the board:
* Report publicly the processes for making appointments to the board?
* Make publicly available the names of all board members, together with their relevant other interests
6) Roles and Responsibilities
*Is there a clearly defined division of responsibilities at the head of the body?
7) Does the board:
*** Meet regularly?
* * Retain full and effective control over the body?
* Monitor the executive management
8) Has the board established a framework of strategic control (or scheme of delegated or reserved powers)
9) Does the framework of strategic control include a formal schedule of those matters specifically reserved for the collective decision of the board? **
10) Does the board maintain the framework of strategic control up to date?
11)Has the board established clearly documented and understood management processes for:
*** Policy development, implementation and review?
*** Decision-making, monitoring, control and reporting?
12) Has the board established formal procedural and financial regulations to govern the conduct of its business?
*13) Has the board established appropriate arrangements to ensure that it has access to all such relevant information, advice and resources as is necessary to enable it to carry out its role effectively?
*
14) Where the body is responsible for making appointments to the board, has it established a formal process to ensure that such appointments are made:
* In accordance with specified criteria?
* On the basis of merit and the individual’s ability to carry out a defined role within the organisation?
15) Where the body is responsible for making appointments to the board, are such appointments dealt with by the board as a whole?
16) Is the role of the chairman formally defined in writing?
*
17) Are non-executive board members:
** Independent of management?
** Free from any other relationships which may materially interfere with exercising an independent judgement on issues of strategy, performance, resources and standards of conduct?
*
18) Are the duties, terms of office, remuneration and its review of non-executive board members defined clearly?
19) Where the body is responsible for making appointments of non-executives to the board:
Are appointments for a fixed term?
*Are appointments subject to a formal appraisal process?
20) Does the chief executive have line responsibility for all aspects of executive management?
21) Is he or she accountable to the board for the ultimate performance and implementation of the board’s policy?
*
22) Has the board made a senior executive responsible for ensuring that appropriate advice is given to it on all financial matters?
23) Has the board made a senior executive responsible for ensuring that board procedures are followed and that all applicable statutes and regulations, and other relevant statements of best practice are complied with?
24) Has the board established a remuneration committee to make recommendations on the remuneration of top executives?
FINANCIAL REPORTING AND INTERNAL CONTROLS
Financial Reporting
25) Annual Reporting
*Does the board publish on a timely basis an objective, balanced and understandable annual report?
26) Does the board include in its annual report a statement explaining its responsibility for the body’s accounts?
*
27) Does the board include in its annual report a statement confirming that it has complied with relevant standards or codes of corporate governance?
*Internal Controls
28) Has the board taken steps to ensure that systems of internal control:
Are established?
Continue to operate in practice?
29) Does the board include in its annual report a statement on the effectiveness of the body’s systems of internal control?
30) Has the board taken steps to ensure that effective systems
of risk management are established as part of the systems of internal control?
31) Has the board taken steps to ensure that an effective internal audit function is established as part of the systems of internal control?
32) *Has the board established an audit committee with responsibility for the independent review of the systems of internal control and the external audit process?
External Auditors
33) Has the board taken steps to ensure that an objective and professional relationship is maintained with the external auditors?
STANDARDS OF BEHAVIOUR
Leadership
34) Has the board taken steps to ensure that its members exercise leadership by conducting themselves in accordance with high standards of personal behaviour?
Code of Conduct
35) Has the board developed a formal code of conduct defining the standards
of personal behaviour, to which individual board members and all employees of the body are required to subscribe?
36) *Has the board established appropriate mechanisms to ensure that members and employees of the body are not influence by prejudice, bias or conflicts of interest?
The problem in India is that there is a feeling that violators first may not be detected and even if detected, they can get away very easily. We will therefore have to focus very effectively on creating proper public governance and making changes in the various regulations impinging on the working of an enterprise or a body like the capital market, if we want to usher in an era of better corporate governance in the country.
Ultimately, corporate governance is the net result of the individual sense of values, the values held in society or part of a society like professional bodies or business associations and finally the system of public governance. If those who violate the norms are effectively punished then there is a fear and there will be adherence of the principles of corporate governance.