Wednesday, March 21, 2012

Corporate Governance Initiatives in India

Confederation of Indian Industry (CII) set up a committee to examine corporate governance issues and recommend a voluntary code of best practices and started the initiative to improve corporate governance in India. The first draft of the code was prepared by April 1997, and the final document was released in April 1998.

The document said, “The objective of good corporate governance is maximizing long-term shareholder value. Since shareholders are residual claimants, this objective follows from a premise that, in well performing capital and financial markets, whatever maximizes shareholder value must necessarily maximize corporate prosperity, and best satisfy the claims of creditors, employees, shareholders and the state.

Some of the recommendations are:

Recommendation 1 - There is no need to adopt the German system of two-tier boards to ensure desirable corporate governance. A single board, if it performs well, can maximise long term shareholder value just as well as a two- or multi-tiered board. Conversely, there is nothing to suggest that a two-tier board, per se, is the panacea to all corporate problems. However, the full board should meet a minimum of six times a year, preferably at an interval of two months, and each meeting should have agenda items that require at least half a day’s discussion.

Recommendation 2 - Any listed companies with a turnover of Rs.100 crores and above should have professionally competent and acclaimed non-executive directors, who should constitute· at least 30 percent of the board if the Chairman of the company is a non-executive director, or · at least 50 percent of the board if the Chairman and Managing Director is the same person.

Recommendation 3 - No single person should hold directorships in more than 10 companies. This ceiling excludes directorships in subsidiaries (where the group has over 50% equity stake) or associate companies (where the group has over 25% but no more than 50% equity stake).

Recommendation 4 - For non-executive directors to play an important role in maximising long term shareholder value, they need to· become active participants in boards, not passive advisors; · have clearly defined responsibilities within the board; and · know how to read a balance sheet, profit and loss account, cash flow statements and financial ratios and have some knowledge of various company laws. This, of course, excludes those who are invited to join boards as experts in other fields such as science and technology.

Recommendation 5 - To secure better effort from non-executive directors, companies should: · Pay a commission over and above the sitting fees for the use of the professional inputs. The present commission of 1% of net profits (if the company has a managing director), or 3% (if there is no managing director) is sufficient. · Consider offering stock options, so as to relate rewards to performance. Commissions are rewards on current profits. Stock options are rewards contingent upon future appreciation of corporate value. An appropriate mix of the two can align a non-executive director towards keeping an eye on short term profits as well as longer term shareholder value.

Recommendation 6 - While re-appointing members of the board, companies should give the attendance record of the concerned directors. If a director has not been present (absent with or without leave) for 50 percent or more meetings, then this should be explicitly stated in the resolution that is put to vote. As a general practice, one should not re-appoint any non-executive director who has not had the time attend even one half of the meetings.

Recommendation 7 - Key information that must be reported to, and placed before, the board must contain:
* Annual operating plans and budgets, together with up-dated long term plans. · Capital budgets, manpower and overhead budgets.
* Quarterly results for the company as a whole and its operating divisions or business segments.
* Internal audit reports, including cases of theft and dishonesty of a material nature. · Show cause, demand and prosecution notices received from revenue authorities which are considered to be materially important. (Material nature is any exposure that exceeds 1 percent of the company’s net worth).
* Fatal or serious accidents, dangerous occurrences, and any effluent or pollution problems.
Related Web Pages
National Foundation for Corporate Governance
Reports of various committees on corporate governance in India
The state of corporate governance in India, 2008

Original Knol - Knol 51

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