Wednesday, 09 April 2014 04:46




Corporate Governance could be defined as ways of bringing the interests of investors and managers into line and ensuring that firms are run for the benefit of investors. It is concerned with the relationship between the internal governance mechanisms of corporations and society’s conception of the scope of corporate accountability.

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.

Voluntary Guidelines issued by Ministry of Corporate Affairs with respect to Corporate Governance

• Companies should issue formal letters of appointment to Non-Executive Directors (NEDs) and Independent Directors as is done by them while appointing employees and Executive Directors. Such a formal letter should form a part of the disclosure to shareholders at the time of the ratification of his/her appointment or re-appointment to the Board.

• The offices of chairman of the board and chief executive officer should be separate.

• The companies may have a Nomination Committee comprising of majority of Independent Directors, including its Chairman. This Committee should consider:

a) Proposals for searching, evaluating, and recommending appropriate Independent Directors and Non-Executive Directors [NEDs], based on an objective and transparent set of guidelines which should be disclosed and should, inter-alia, include the criteria for determining qualifications, positive attributes, independence of a director and availability of time with him or her to devote to the job;

b) Determining processes for evaluating the skill, knowledge, experience and effectiveness of individual directors as well as the Board as a whole.

c) With a view to enable Board to take proper and reasoned decisions, Nomination Committee should ensure that the Board comprises of a balanced combination of Executive Directors and Non-Executive Directors.

d) The Nomination Committee should also evaluate and recommend the appointment of Executive Directors.

e) A separate section in the Annual Report should outline the guidelines being followed by the Nomination Committee and the role and work done by it during the year under consideration

• Independent Directors and NEDs should hold no more than seven directorships.

• The Board should put in place a policy for specifying positive attributes of Independent Directors such as integrity, experience and expertise, foresight, managerial qualities and ability to read and understand financial statements.

Disclosure about such policy should be made by the Board in its report to the shareholders. Such a policy may be subject to approval by shareholders.

• All Independent Directors should provide a detailed Certificate of Independence at the time of their appointment, and thereafter annually. Independent Directors should be restricted to six-year terms. They must leave for three years before serving another term, and they may not serve more than three tenures for a company.

• Independent Directors should have the ability to meet with managers and should have access to information.

• NEDs should be paid either a fixed fee or a percentage of profits. Whichever payment method is elected should apply to all NEDs. NEDs paid with stock-options should hold onto those options for three years after leaving the board.

• Independent Directors should not be paid with stock options or profit-based commission.

• The Remuneration Committee should have at least three members with the majority of NEDs, and at least one Independent Director. Their decisions should be made available in the Annual Report.

• The Board should provide training for the directors.

• The Board should enable quality decision-making by giving the members timely access to information.

• The Board should put in systems of risk management and review them every six months.

• The Board should review its own performance annually and state its methods in its Annual Report.

• The Board should put in a system to ensure compliance with the law, which should be reviewed annually. All agenda items should be assessed for its impact on minority shareholders.

• The Audit Committee should be composed of at least three members, with Independent Directors in the majority and an Independent Director as the chairperson.

• The Audit Committee is responsible for reviewing the integrity of financial statements, the company’s internal financial controls, internal audit function and risk management systems. The Audit Committee should also monitor and approve all Transactions.

• The Audit Committee should be consulted on the selection of auditors. The committee must be supplied with relevant information about the auditing firm.

• Every auditor should provide a certificate stating his/her/its arm’s length relationship with the client company.

• The audit partner should be rotated every three years; the firm should be rotated every five years. Audit partners should have a cooling off period of three years before they work with the client company again; the firm should have a cooling off period of five years.

• The Committee may appoint an internal auditor.

• The companies should ensure the institution of a mechanism for employees to report concerns about unethical behavior, actual or suspected fraud, or violation of the company’s code of conduct or ethical policy.

• The companies should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allow direct access to the Audit Committee Chairperson in exceptional cases.