Corporate Governance

An
Insight In Committee Report
On Corporate Governance
By
Naresh Chandra, Retired IAS
(Padma Vibhushan)
 Corporate Governance

Corporate governance is the set of processes, customs, policies, laws,

and institutions affecting the way a corporation is directed, administered
or controlled.

Corporate governance also includes the relationships among the

many stakeholders involved and the goals for which the corporation is
governed.

An important theme of corporate governance is to ensure

the accountability of certain individuals in an organization through
mechanisms that try to reduce or eliminate the principal-agent problem.
 Evolution: Corporate Governance
History records 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, Kautilya, an official says an ideal king is one for
whom-

“In 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 to the king”
(English Translation from the Sanskrit version of Arthasastra)

Kautilya elaborates on the fourfold duty of a king as-

• Raksha or protection
• Vruddi or enhancement
• Palana or maintenance
the substitution of the sate with the 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/ CEO/ Board
of a company can be interpreted to imply-

• Shareholders wealth
Raksha or protection

Vruddi or • Wealth through proper

enhancement utilization of assets

Palana or • Of that wealth

maintenance

Yogakshema or • Interest of shareholders

safeguard
 Naresh Chandra

Naresh Chandra (b. 1934) is an Indian Civil Servant who has served as the Cabinet
Secretary  (1990-92) and the Indian Ambassador to the US (1996-2001). He was
awarded the Padma Vibhushan for his service, in 2007.
 INTRODUCTION
CR reforms came into prominence for the first time after the south east and east asian crisis 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 committee was setup by ministry of finance in 2002.

Major objectives of this committee are:

• The statutory auditor- company relationship, so as to further strengthen the professional nature of 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
– In line with international best practices, the
committee recommends an abbreviated list of
disqualification for auditing assignments.
• 2.2: List of prohibited non-audit services
– The committee recommends services which should
not be provided by an audit firm to any audit clients.
• 2.3: Independence standards for consulting and
other entities that are affiliated to audit firms.
• 2.4: Compulsory Audit partner rotation
Recommendations in chapter 2 : the auditor
-company Relationship
2.5: Auditor’s disclosure of contingent liabilities.

2.6: Auditor’s disclosure of qualifications and consequent action

2.7: Management’s certification in the event of auditor’s replacements

2.8: Auditor’s 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 •
•
Procedure for dealing with complaint cases
Disciplinary committee Council
disciplinary • Appellate body
mechanism for •
•
Publication of decision of the Disciplinary committee
Funding
auditors
 Recommendations in chapter 4 :
Independent Directors

4.4: Disclosure on
4.1: Defining an 4.2: Percentage of 4.3: Minimum Board duration of Board
Independent director Independent Directors size of listed companies meeting/committee
meeting

No material
relationship with No less than 50% of Minimum size of 7
company, its directors should be with atleast 4
promoters or independent independent directors
management
 Recommendations in chapter 4 :
Independent Directors

4.8: Audit committee

charter
4.7: Independent
directors on audit
committees of listed
4.6: Additional companies
disclosure to directors
• All company press
4.5: Teleconferencing
releases should be
and video
presented to the
conferencing
board members
• Directors can attend
proceedings through
vidoe conferencing if
physical attendance
is not possible
 • DCA should
encourage
prominent
institution
to conduct
regular
training
Recommendations in chapter 4 :

• Review of programs
for
statutory independen
limit on t directors
sitting fees • independen
Independent Directors

• No revision
t directors
required on should
current attend at
provisions least one
on stock such course
option and before
1% assuming
commission responsibili
on net ties
profits • A trainee
appraisal
system
should be
used to
judge
quality of
4.10: Exempting non- programs.
4.9: Remuneration of

executive directors

4.11: Training of
non-executive

independent
from certain
liabilities
directors

directors
 Recommendations in chapter 5 : Other
Recommendations
• 5.1: SEBI and Subordinate Legislation
• 5.2: Improving facilities in DCA offices
• 5.3: Corporate Serious Fraud offices
– Rationalization of penalties
– Disqualification for serious offences
– Strengthening of DCA’s prosecution wing
– Managers/Promoters to be held personally liable when
found guilty of offences
– Consolidated Financial Statements to be made
mandatory for companies having subsidiaries
Recommendations in chapter 5 : Other
Recommendations
●
Create a system of “Pre-certification” by
company secretaries
5.5: ●
Amend Companies Act to allow DCA TO
conduct ‘compliance audits

●
MAOCARO should be amended so that Auditor’s report
contain violations

5.6: Introduce a system ‘random scrutiny’ of audited accounts as

●

is done by the Accounting Foundation in the UK

●
Allow companies to establish an internal Code of Ethics DCA
should sponsor research on corporate governance