Corporate Governance & Business Ethics

(Group Presentations)

31st Jan ’18 (19)

Corporate Governance & Business Ethics
(Clause 49 Provisions for Listed Companies)

2nd Feb ’18 (20)

 Heirarchy of Guilt

5. Inadequate
Controls & Processes

4. Audit /Auditor Lapses

3. Management

2. Nominees on Board of Directors

1. Declining Ethics and Values

The major contributing factor is “Declining Ethics & Values” – and yet when
things go wrong, our focus is towards tweaking the controls & processes!!!!
 Clause 49 – Key requirements – Listed Companies

Cl 49 of the Listing Agreement to the Indian Stock Exchange covers

various aspects related to CG.
Purpose is to improvement of CG in all listed companies .
(Applicable to all Cos with Equity of >Rs 10 crs, or NW > Rs 25 crs)

This is hoped to be achieved thru’ provisions that have the aim of:
• Improving Disclosure and Transparency (Transparency)
• Specifying Duties / Responsibilities of the Board. (Accountability)
• Protecting the Rights of minority shareholders (Fairness)
• Recognizing & protecting the Rights of other stakeholders (Fairness)
 Clause 49 – Key requirements – Listed Companies
1. Board Independence
a. Composition:
1. Minimum 50% of Board should consist of Non-Executive Directors, and
at least one woman Director
2. If the Chairman is an Executive (or Promoter or related to a promoter )
– min. 50% of the Board should consist of Independent Directors
3. Where the Chairman is not an Executive – at least 1/3rd (33%) should
be Independent Directors.
4. Meet 4 times a year (maximum 3 months between meetings)
b. Limits of IDs:
Maximum: In 7 Listed companies (A Whole-time Director cannot be an
Independent Director for more than 3 listed Companies)
c. Tenure for IDs:
Maximum 5 years at a time; can be reappointed for another 5 years.
(Can be considered for reappointment as IDs only after a gap of 3 years)
 Removal of Directors....

Directors are answerable to Shareholders;

Hence the power to remove Directors also rests with Shareholders –

(unless the Director is appointed by the Tribunal, or a nominee of
Financial Institutes) --- by passing an Ordinary Resolution in a General
Meeting, to remove a Director;

Other ways of removal of Directors are

• Termination by National Company Law Tribunal
• Resignation

Grounds of removal could be varied – Misconduct, Mismanagement,

Breach of Trust, Disagreement over Policies pursued, Convicted by courts,
Failure to disclose conflicts of Interest …..
 Remuneration for Directors:
Limits for compensation to Directors/KMPs:
Payment to any ONE WTD Director – not more than 5% of Net Profits;
For all WTD Directors together – not more than 10% of Net Profits;
For other Directors individually – not more than 1% of Net Profits;

Independent Directors:
Only by way of sitting Fee, reimbursement of expenses, and profit related
commission (as approved by shareholders); No stock options.
Sitting Fee: Max. Rs 1 lakh per meeting

[Disqualifications for appointment as Director:

Age less than 21, Unsound mind, Insolvent, convicted for any offence for more
than 6 months (including related party transactions)]
 6 Q’s Directors need to ask when they accept a position on the Board

1 Designation-”Director”, but not on Yes – anyone holding himself out as

the Board, do you have the same a Director assumes the same
liability as a Board member? liabilities as a Board member

2 Is a Director of a Limited liability, All Directors have unlimited liability

covered for personal liability? for their actions. The only limitation
is upto paid-up share cap. of the
Co.
3 Do Non Ex (Independent)Directors In law, there are no such terms. All
have fewer responsibilities than Ex Directors are equal, and each has
Directors? a single vote.
 6 Q’s Directors need to ask when they accept a position on the Board
4 In a limited liability Co, Prime loyalty of a Director is to the Co as a
what is the prime duty of separate legal entity. If the BOD ensures long
a Director & the Board to term health of the Co they are doing their
the shareholders? fiduciary duty.
5 If you advise & work with People who directly influence a decision, and
the Board, as a Senior have the time and capacity to debate the
Manager, or a Consultant, decision with the BOD, are considered as
do you avoid Directorial “shadow Directors” & hence liable.
liability? Unclear. No legal precedent or law at present.
6 Are Directors of state If Cos are fully state owned Co Law is
owned organizations applicable; If even a small portion is issued to
exempt fm normal the public, all regulations of SEBI also become
directorial applicable. Ongoing tussle between ONGC,
responsibilities? NTPC etc & SEBI in respect of compliance with
Cl 49 of listing agreement.
 Clause 49 – Key Requirements – Listed Companies

2. Audit Committees
1. Chairman of the committee must be an Independent Director
2. Minimum 3 Directors, 2/3rd of whom must be Independent
3. All members to be “financially literate” and at least one of
them to have financial management expertise

3. Remuneration Committee
1. Chairman of the Committee must be an Independent Director
2. Minimum 3 Directors (ALL Non-Executive), and at least half
must be Independent.
 Clause 49 – Key Requirements – Listed Companies

4. Disclosures – to ensure transparency wrt to financial and other

matters; specifically the following disclosures are mandatory:
1. Related party transactions
2. Accounting treatment and departures
3. Risk Management
4. Annual Report to include detailed chapter on Management
Discussion & Analysis
5. Compensation for Directors and obtain shareholder approval
6. Details of compliance history for past 3 years
7. CG Reports. Any non-compliance with mandatory recommendations
to be highlighted
8. Quarterly results, presentations made to analysts to be available
on company’s website
 Clause 49 – Key Requirements – Listed Companies
5. CEO / CFO certification
• Fairness of financial statements
• Effectiveness of internal controls
• Legality of transactions
and accept responsibility for all such matters
6. Others
• Whistleblower policy (earlier optional) now made mandatory for
specified companies (Policy that lays down process for reporting
unethical or harmful actions without fear of retribution).
• Report on CG, highlighting any non-compliance
• Evaluate Non-Executive Board performance
 Clause 49 compliance status
Compliance and Enforcement :
incomplete across corporate India. (Compliance ratio of BSE
companies quite low at approx. 50%)
PSU’s and small and medium sized enterprises struggling to comply
Enforcement against defaulting companies poor – significant
political pressure reason for non-action against defaulting PSU’s.

Large number of listed firms have come under regulatory scanner for
discrepancies in their quarterly CG Reports, where they are
required to provide details of compliance with norms governing
board of directors, use of public funds and CEO salaries.
 (a) How large should the Board be?

1. Large Board: Advantages: Diversity, broader perspectives, greater

range of ideas, more skill sets, more experience, shared workload

2. Small Board: Advantages: Small groups take more ownership,

everyone is engaged, greater harmony, greater feeling of unity and
purpose, greater flexibility.

3. Actual size will depend on number of factors viz. size of organization,

complexity of operations, skills and diversity required.
 (b) Should Chairman and CEO positions be separate?

1. Executive Compensation – The Board of Directors decides

executive compensation. When the CEO is also the Chairman,
there is a conflict of interest as the CEO is voting on his own
compensation.
2. Corporate Governance – One of the Board’s main roles is to
monitor the operations of the Company. CEO is the management
position responsible for the operations. A combined role implies
monitoring himself.
3. Audit Committee independence – Should consist of external,
independent members. Having a CEO in the chair limits the
effectiveness of the committee.
Tools for fighting Fraud

• Role of Technology
• Whistle Blowing
• Fraud Response Plan
• Third Party due Diligence
• Independent Directors
 Tackling Governance Failures thru’….

1. Public Accountability - Critical Role of Civil Society.

2. Participatory Governance – Stakeholders and communities
interests to be protected
3. Strong Policies (eg SOX – Sarbanes-Oxley Act in US in response to
public outrage over corporate scandals – to prevent financial fraud,
Clause 49 of Listing Agreement in India, CEOs & CFOs have to
personally vouch for accuracy of reports in all areas)

4. Much more competent and ethical leaders

Corporate Governance.. India - Changing Regulatory Landscape

Public Interest Disclosure (Protection of Informers) Bill, 2010:

(Expected to encourage disclosure of information in public interest, but Pvt
Sector is excluded; Provides limited protection to whistle-blower);

The Prevention of Bribery of Foreign Public Officials(FPO)& Officials of Public

International Organizations (OPIO) Bill, 2011
(criminalizes acceptance or solicitation of bribes by FPO’s and OPIO’s;
criminalizes offers of bribes to FPO’s and OPIO’s for winning business)

The Prevention of Corruption Amendment Act, 2011

(greater power for offences of using undue influence on public servants, causing
loss to the govt., empowered to seize property of convicted persons)
Corporate Governance.. India - Changing Regulatory Landscape

Companies Bill, 2011:

(Serious Fraud Investigation Office (SFIO) has powers to probe
companies suspected of fraud; Power to arrest persons for
suspected fraud)
Data Privacy Laws
(To prevent use or gathering of personal information without knowledge
of concerned persons; to protect personal information)
The Competition Act
(Anti-competitive agreements; abuse of dominant position; regulation
relating to combination)
The Sexual Harassment of Women at Workplace (Prevention,
Prohibition, and Redressal) Act, 2013