corporate governance committes
- 3. In 2002, Sarbanes–Oxley was named after sponsors U.S. Senator Paul Sarbanes and U.S. Representative Michael G Oxley, According to SOX, top management must individually certify the accuracy of financial information. In addition, penalties for fraudulent financial activity are much more severe. Also, SOX increased the oversight role of boards of directors and the independence of the outside auditors who review the accuracy of corporate financial statements.
- 4. The Act was enacted as a reaction to a number of major corporate and accounting scandals in Enron, Tyco, WorldCom etc., These scandals cost investors billions of dollars when the share prices of affected companies collapsed, and shook public confidence in the US securities Market. The act calls for protection to those who have the courage to bring frauds to the attention of those who have to handle fraud. SOX Act 2002 act address all the issues associated with corporate failures to achieve quality governance and to restore investor’s confidence.
- 5. Provisions of SOX Act 2002 Establishment of Public Company Accounting Oversight Board (PCAOB): New board of Directors consist of 5 members full-time and independent of whom two will be Certified Public Accountant ( CPAs) to serve. Responsible for: - All accounting firms will have to register themselves with board and submit all the details, particulars of fees received from public company clients for audit and non-audit services, financial information about the firm, list of firm’s staff who participate in audits, quality control policies, information of civil, criminal and disciplinary proceedings against the firm or any of the staff.
- 6. • Establishing and/or adopting auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers. • The board must send reports of securities and exchange Commission (SEC) Audit Committee: Sarbanes-Oxley defines “audit committee” for purposes of the Act and the Exchange Act as: “a committee (or equivalent body) established by and amongst the board of directors of an issuer for purposes of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and …if no such committee exists with respect to an issuer, the entire board of directors of the issuer”
- 7. Section 301 of Sarbanes-Oxley adds new Section 10A(m) to the Exchange Act and requires that by April 26, 2003 the SEC, by rule, direct the national securities exchanges to prohibit the listing of securities of any company, including foreign companies, that do not meet the following requirements: Each member of the company’s audit committee must be a director and must otherwise be independent; : The audit committee must be responsible for hiring and discharging the independent auditors The audit committee shall be responsible for approval or
- 8. The audit committee shall receive reports from the independent auditors regarding critical accounting polices and practices, discussions that have taken place with management regarding alternative treatments of financial information under GAAP, and any accounting disagreements and other material written communications between the auditors and management The audit committee must establish procedures to receive and address complaints regarding accounting, internal control and audit issues, and to provide company employees an opportunity to make confidential, anonymous submissions regarding accounting and auditing matters
- 9. Public accounting firms should not perform any audit service for a publicly traded company if CEO, CFO, CAO, controller or any person equivalent position was employed by such firm and participated in any capacity in the audit of the co. during the one year period preceding the date of initiation of the audit to safe guard the conflict of interest. SOX Act provides for mandatory rotation of the lead auditor, co-ordinating partner and the partner reviewing audit once every 5 years. This act says that, Auditors are prohibited fro providing non- auditing services which includes
- 10. Book-keeping Financial information system design and implementation Appraisal or valuation services Internal audit outsourcing services Broker or dealers, investment banking services, legal services unrelated to audit
- 11. Sarbanes-Oxley requires two types of certifications by the CEOs and CFOs of all SEC reporting companies On August 27, the SEC adopted Exchange Act rules required to implement Section 302 of Sarbanes-Oxley, which requires a company’s CEO and CFO to certify the contents of the company’s quarterly and annual reports. The CEO and CFO must certify that: he or she has reviewed the report; based on his or her knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the
- 12. the circumstances under which such statements were made, not misleading; based on his or her knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report; • SOC Act prohibits US or foreign companies with securities traded within the US from making or arranging from third parties any type of loan to directors.
- 13. Section 307 of Sarbanes-Oxley requires the SEC to issue rules by January 26, 2003 that will set forth minimum standards of professional conduct for attorneys appearing and practicing before the SEC in any way in the representation of issuers, : Requiring an attorney to report evidence of a material violation of securities law or breach of fiduciary duty or similar violation by the issuer or any agent thereof, to the chief legal counsel or the CEO of the issuer; and
- 14. • If the counsel or officer does not appropriately respond to the evidence (adopting, as necessary, appropriate remedial measures or sanctions with respect to the violation), requiring the attorney to report the evidence to the audit committee of the board of directors of the issuer or to another committee of the board of directors comprised solely of directors not employed directly or indirectly by the issuer, or to the board of directors. The SOX act has a provisions under which broker and dealers of securities should not retaliate or threaten to retaliate an analyst employed by he broker or dealer for any adverse, negative or unfavourable research report on a public company.
- 15. Penalties: The penalties prescribed under SOX At for any wrongdoing are very stiff. Penalties for wilful violations are even stiffer. Any CEO or CFO providing a certificate knowing that it does not meet with the criteria as stated may be fined up to $1million or imprisonment or both. Conclusions Sarbanes-Oxley makes it easier to prosecute securities fraud, particularly financial fraud. One of the most direct ways in which the Act accomplishes this objective is to place greater responsibility on senior management and directors, particularly independent directors and audit committee members, by requiring them to take a substantially more proactive role in overseeing and monitoring the financial reporting process, including disclosure and reporting systems and internal controls
- 16. Kumara Mangalam Birla Committee Report on Corporate Governance, 1999 The Securities and Exchange Board of India (SEBI) appointed a committee on corporate governance on 7 May 1999, with 18 members under the chairmanship of Kumar Mangalam Birla with a view to promoting and raising the standards of corporate governance. The committee’s terms of reference were: (a) to suggest suitable amendments to the listing agreement (LA) executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies in areas such as continuous disclosure of material information,
- 17. both financial and non-financial, manner and frequency of such disclosures, responsibilities of independent and outside directors b) to draft a code of corporate best practices and (c) to suggest safeguards to be instituted within in the companies to deal with insider information and insider trading. Objectives: • Enhancement of shareholder value, keeping in view the interests of other stakeholder • To treat the code not as a mere structure, but as a way of life • Proactive initiatives taken by the companies themselves and not in the external measures
- 18. Mandatory Recommendations: 1. Applicability: To all listed companies with paid-up share capital of Rs. 3 core and above. Board of Directors: The Committee recommends that the board of a company have an optimum combination of executive and non- executive directors with not less than 50% 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 a company has a non- executive chairman, at least one-third of board should comprise of independent directors and in case a company has an executive chairman, at least half of board should be independent.
- 19. Audit Committee: A system of good corporate governance promotes relationships of accountability between the principal actors of sound financial reporting – the board, the management and the auditor. It holds the management accountable to the board and the board accountable to the shareholders. The audit committee’s role flows directly from the board’s oversight function. It acts as a catalyst for effective financial reporting. the audit committee should have minimum three members, all being non executive directors, with the majority being independent, and with at least one director having financial and accounting knowledge; the chairman of the committee should be an independent director; the chairman should be present at Annual General Meeting to answer shareholder queries.
- 20. The Committee recommends that to begin with the audit committee should meet at least thrice a year. One meeting must be held before finalisation of annual accounts and one necessarily every six months. The quorum should be either two members or one-third of the members of the audit committee, whichever is higher and there should be a minimum of two independent directors Functions: Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
- 21. Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services. Reviewing with management the annual financial statements before submission to the board. Reviewing with the management, external and internal auditors, the adequacy of internal control systems. Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure, coverage and frequency of internal audit. Discussion with internal auditors of any significant findings and follow- up thereon.
- 22. Remuneration Committee of the Board: Full disclosure of 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.
- 23. Board procedures: Board meetings should be held at least four times in a year, with a maximum time gap of four months between any two meetings 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 Management: Aim is - To maximize shareholder value without being detrimental to the interests of other stakeholders 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
- 24. Functions of management includes Assisting the board in its decision making process Implementing the policies and code of conduct of the board Managing the day to day affairs of the company Ensuring compliance of all regulations and laws Ensuring timely and efficient service to the shareholders To protect shareholder’s rights and interests. Setting up and implementing an effective internal control systems, commensurate with the business requirements. Implementing and comply with the Code of Conduct Co-operating and facilitating efficient working of board committees
- 25. As part of the directors’ report or as an addition there to, a Management Discussion and Analysis report should form part of the annual report to the shareholders Industry structure and developments. Opportunities and Threats Segment-wise or product-wise performance. Outlook. Risks and concerns Internal control systems and their adequacy. Discussion on financial performance with respect to operational performance. Material developments in Human Resources /Industrial Relations front, including number of people employed.
- 26. Shareholders: Aim – To provide adequate avenues to the shareholders for effective contribution in the governance of the company while insisting on a high standard of corporate behaviour without getting involved in the day to day functioning of the company. Responsibilities of share holders includes Effective participation in AGM Involvement in the appointment of the directors and the auditors *In case of the appointment of a new director or re-appointment of a director the shareholders must be provided with director’s resume, functional expertise and past record of directorship
- 27. Basic rights are Right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes (Beyond Companies Act) * RTI through company/exchange website Half-yearly declaration of financial performance to be sent to each household of shareholders. Convenient AGM venue and voting system A board committee under the chairmanship of a non-executive director to look after shareholders’ grievances
- 28. Manner of Implementation: Empower SEBI and stock exchanges to take deterrent action in case of violation of provisions Suitable amendments to the Companies Act in respect of the recommendations Separate section on Corporate Governance in the annual reports of companies Obtain a certificate from the auditors of the company regarding compliance of mandatory recommendations
- 29. Recommendations of Naresh Chandra Committee - 2002 On 21st August, 2002, Naresh Chandra Committee was appointed as a high level committee by Department of Company Affairs (DCA) to examine various Corporate Governance (CG) issues. Naresh Chandra Committee Report on “CORPORATE AUDIT & GOVERNANCE” has taken forward the recommendations of Kumar Mangalam Birla Committee on CG on the following to counts: Representation of Independent Directors on a company’s board The Composition of Audit Committee
- 30. AS per the report of the Naresh Chandra Committee, the following mandatory recommendations relating to corporate governance have to be implemented by SEBI Disclosure of Contingent Liabilities: Management should provide a clear description in plain English of each material contingent liability and its risks, which should be accompanied by the auditor’s clearly worded comments on the management’s view. This section should be highlighted in the significant accounting policies and notes on accounts, as well as, in the auditor’s report, where necessary.
- 31. This is important because investors and shareholders should obtain a clear view of a company’s contingent liabilities as these may be significant risk factors that could adversely affect the company’s future financial condition and results of operations. CEO / CFO Certification: For all listed companies, there should be a certification by the CEO (either the Executive Chairman or the Managing Director) and the CFO (whole-time Finance Director or other person discharging this function) which should state that, to the best of their knowledge and belief
- 32. They have reviewed the balance sheet and profit and loss account and all its schedules and notes on accounts, as well as the cash flow statements and the Directors’ Report; These statements do not contain any material untrue statement or omit any material fact nor do they contain statements that might be misleading; These statements together present a true and fair view of the company, and are incompliance with the existing accounting standards and / or applicable laws / regulations; They are responsible for establishing and maintaining
- 33. systems of the company; and they have also disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, and what they have done or propose to do to rectify these; They have also disclosed to the auditors as well as the Audit Committee, instances of significant fraud, if any, that involves management or employees having a significant role in the company’s internal control systems; and They have indicated to the auditors, the Audit Committee and in the notes on accounts, whether or not there were significant changes in internal control and / or of accounting policies during the year
- 34. Independence of Audit Committee: All members of the audit Committee shall be non-executive directors. Relationship between Auditors and clients: An audit firm should not derive more than 25% of its business from a single corporate client. The committee also recommended that at least 50% of the audit team working on the accounts of a company, need to be rotated by the audit firm once in every 5 years. Setting up of quality review boards by the Institute of Charted Accountants of India (ICAI), Institute of company secretaries of India and the Institute of cost and works accountant of India, instead of a Public Oversight Board similar to the one in the US.
- 35. List of prohibited non-audit services: Accounting and bookkeeping services, related to the accounting records or financial statements of the audit client. Internal audit services. Financial information systems design and implementation, including services related to IT systems for preparing financial or management accounts and information flows of a company. Actuarial services. Broker, dealer, investment adviser or investment banking services. · Outsourced financial services. Management functions, including the provision of temporary staff to audit clients. Any form of staff recruitment, and particularly hiring of senior management staff for the audit client. Valuation services and fairness opinion.
- 36. Minimum Board Size of Listed Companies: The minimum board size of all listed companies, as well as unlisted public limited companies paid-up share capital and fee reserves of ₹10 core and above, or turnover of ₹ 50 core and above should be seven – of which at least four should be independent directors. However, this will not apply to: (1) unlisted public companies, which have no more than 50 shareholders and which are without debt of any kind from the public, banks, or financial institutions, as long as they do not change their character, (2) unlisted subsidiaries of listed companies.
- 37. Disclosure on Duration of Board Meetings / Committee Meetings: The minutes of board meetings and Audit Committee meetings of all listed companies, as well as unlisted public limited companies with a paid-up share capital and free reserves of ₹10 crore and above or turnover of ₹ 50 crore must disclose the timing and duration of each such meeting, in addition to the date and members in attendance. Tele-Conferencing and Video Conferencing: If a director cannot be physically present but wants to participate in the proceedings of the board and its committees, then a minute and signed proceedings of a Tele – Conference or Video Conference should constitute proof of his or her participation.
- 38. Accordingly, this should be treated as presence in the meeting(s). However, minutes of all such meetings should be signed and confirmed by the director/s that has/have attended the meeting through video conferencing. Independent Directors on Audit Committees of Listed Companies: Audit Committees of all listed companies, as well as unlisted public limited companies with a paid-up share capital and free reserves of ₹ 10 crore and above, or turnover of ₹ 50 crore and above, should consist exclusively of independent directors. However, this will not apply to: (1) unlisted public companies, which have no more than 50 shareholders and which are without debt of any kind from the public, banks, or financial institutions, as long as they do not change their character, (2) unlisted subsidiaries of listed companies
- 39. Narayana Murthy Committee Report 2003 The SEBI Committee on Corporate Governance (the “Committee”) was constituted under the Chairmanship of Shri N. R. Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies Limited. The terms of reference of the Committee are set out below To review the performance of corporate governance; and To determine the role of companies in responding to rumour and other price sensitive information circulating in the market, in order to enhance the transparency and integrity of the market
- 40. Mandatory Recommendations: 1. Audit Committee: Audit committees of publicly listed companies should be required to review the following information mandatorily: Financial statements and draft audit report, including quarterly / half-yearly financial information; Management discussion and analysis of financial condition and results of operations; Reports relating to compliance with laws and to risk management; Management letters / letters of internal control weaknesses issued by statutory / internal auditors; and Records of related party transactions
- 41. 2. Financially Literate members of the audit committee: All audit committee members should be “financially literate” and at least one member should have accounting or related financial management expertise. 3. Disclosure of accounting treatment: In case a company has followed a treatment different from that prescribed in an accounting standard, management should justify why they believe such alternative treatment is more representative of the underlying business transaction. Management should also clearly explain the alternative accounting treatment in the footnotes to the financial statements.
- 42. 4. Related Party Transactions: A statement of all transactions with related parties including their bases should be placed before the independent audit committee for formal approval / ratification. If any transaction is not on an arm’s length basis, management should provide an explanation to the audit committee justifying the same. 5. Risk Management: Procedures should be in place to inform Board members about the risk assessment and minimization procedures. These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework. Management should place a report before the entire Board of Directors every quarter documenting the business risks faced by the company, measures to address and minimize such risks, and any limitations to the risk taking capacity of the corporation. This document should be formally approved by the Board.
- 43. 6. Proceeds from Initial Public Offerings (“IPO”): Companies raising money through an Initial Public Offering (“IPO”) should disclose to the Audit Committee, the uses / applications of funds by major category (capital expenditure, sales and marketing, working capital, etc.), on a quarterly basis. On an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus. This statement should be certified by the independent auditors of the company. The audit committee should make appropriate recommendations to the Board to take up steps in this matter.
- 44. 7. Code of Conduct: It should be obligatory for the Board of a company to lay down the code of conduct for all Board members and senior management of a company. This code of conduct shall be posted on the website of the company. 8. Nominee directors: There shall be no nominee directors. Where an institution wishes to appoint a director on the Board, such appointment should be made by the shareholders. An institutional director, so appointed, shall have the same responsibilities and shall be subject to the same liabilities as any other director. Nominee of the Government on public sector companies shall be similarly elected and shall be subject to the same responsibilities and liabilities as other directors
- 45. 9. Non-Executive Director Compensation: All compensation paid to non-executive directors may be fixed by the Board of Directors and should be approved by shareholders in general meeting. 10. Whistle Blower Policy: Personnel who observe an unethical or improper practice (not necessarily a violation of law) should be able to approach the audit committee without necessarily informing their supervisors. Companies shall take measures to ensure that this right of access is communicated to all employees through means of internal circulars, etc. The employment and other personnel policies of the company shall contain provisions protecting “whistle-blowers” from unfair termination and other unfair prejudicial employment practices.
- 46. 11. Subsidiary Companies: The provisions relating to the composition of the Board of Directors of the holding company should be made applicable to the composition of the Board of Directors of subsidiary companies. At least one independent director on the Board of Directors of the parent company shall be a director on the Board of Directors of the subsidiary company. The Audit Committee of the parent company shall also review the financial statements, in particular the investments made by the subsidiary company. The minutes of the Board meetings of the subsidiary company shall be placed for review at the Board meeting of the parent company. The Board report of the parent company should state that they have reviewed the affairs of the subsidiary company also.
- 47. Non-Mandatory Recommendations: 1. Audit Qualification: Companies should be encouraged to move towards a regime of unqualified financial statements. This recommendation should be reviewed at an appropriate juncture to determine whether the financial reporting climate is conducive towards a system of filing only unqualified financial statements. 2. Training of Board members: Companies should be encouraged to train their Board members in the business model of the company as well as the risk profile of the business parameters of the company, their responsibilities as directors, and the best ways to discharge them
- 48. 3. Evaluation of Board Performance: The performance evaluation of non-executive directors should be by a peer group comprising the entire Board of Directors, excluding the director being evaluated; and Peer group evaluation should be the mechanism to determine whether to extend / continue the terms of appointment of non-executive directors.
- 49. Recommendation of J.J. Irani Committee on Company Law, 2005 On 2nd December 2004, Government of India constituted an expert committee under the chairmanship of Dr. J.J Irani the then Director of Tata Sons, to review and make recommendations on Company Law. The objectives of the Committee were to address the changes in the national and international scenario facing listed companies, enable internationally accepted best practices and provide adequate flexibility for timely evolution of legal reforms in response to the changing business models.
- 50. The recommendations of the committee highlight on the following areas of the legislations to make necessary modifications into them, 1. Independent Directors in Listed Companies: SEBI, through the revised Clause 49 of the Listed Agreement, has made it to have at least 50 percent of the board of the listed company as independent directors. This has been accepted and validated by the capital market regulators. This proportion has been variance in the report of Dr. J.J. Irani Committee stating to have one-third of the board of a listed company should comprise with independent directors
- 51. 2. Pyramidal Structure: The committee also recommended to adopt the pyramidal corporate structure by every corporate having subsidiary company. This makes the subsidiary company also to become the holding company of other subsidiaries falling under it. This is more suggestive especially in the case of a company acquiring other corporate abroad. “Although the committee started its deliberations under the presumption that only one layer should be allowed, we later decided against it,” Dr. J.J. Irani commented. 3. Power to Shareholders: The core driving force of the committee’s suggestions were to confer complete autonomy to the shareholders and owners of the company to drive in an apparent manner.
- 52. 4. Single Person Company: The committee has also unsettled the concept of single-person Company. Introducing the concept of One Person Company (OPC) as against the current stipulation of at least two persons to form a company, the committee has pitched for entrepreneurship in individuals. “The whole idea is that if there is an entrepreneur who wants to form his own company, he should not be bound down by company law to find other partners,” according to Dr. J.J. Irani. 5. Self-Regulation: One distinctive approach of the committee was to allow corporate to self-regulate their affairs. This is a much-needed orientation for corporate growth in an overall policy regime being provided by the government
- 53. 6. Stringent Penalties: In order to strengthening the deterrent provisions in the present framework, the report has mandated publication of information relating to convictions for criminal breaches of the Company Act on the part of the company or its officers in the annual report. The suggestions to provide stringent penalties will certainly help the regulator to curb fraudulent behaviours of companies
- 54. 7. Accounts and Audits: As per the committee’s view, “Proper and accurate compilation of financial information of a corporate and its disclosure in a manner that is standardized and understood by stakeholder is central to the credibility of the corporate and soundness of investment decisions by the investors. The committee noted the contributions and involvements devoted by the Institute of Chartered Accountants of India (ICAI) and the National
- 55. Don’t compare your self, with others, compare yourself with, yours past experience, manu…