Professional Documents
Culture Documents
GOVERNANCE AN IDEA
WHOSE TIME HAS COME
By
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CERTIFICATE
ACKNOWLEDGEMENTS
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One of the pleasant aspects of preparing a Thesis is the opportunity to thank
to those who have contributed to make the project completion possible.
Last but not certainly the least, I would like to extend my gratitude to the
faculty of Lala Lajpat Rai Institute of Management (LLIM), Mumbai and the
Library staff for equipping me with the basics that helped me throughout the
making of this project.
I am also thankful to Vidya my friend and my sister and all those seen and
unseen hands & heads, which have been of direct or indirect, help in the
completion of this project.
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PROLOGUE
Corporate Governance (CG) has emerged as one of the key elements of public
policy reforms individuals. It is still in its infancy; it has been around only for the
last three to four years. It is however not a foolproof concept as it relies heavily on
data available from insiders. But it has specific and special role to play to enhance
the strength of a particular unit and of the entire corporate sector. Corporate
Governance is to be maintained or observed as effective tool to assure the
stakeholders of their long-term interests without prejudice to public interest.
Thus Corporate Governance (CG) is the way the firm ought to be run, managed
and controlled. It is related with supervision and holding the responsibility of those
who direct and control the management.
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CASE STUDY INDEX
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PRIME TIME MATTER
INTRODUCTION
OBJECTIVE
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It is known fact that vital needs of success of any organization lingers on its ability
to mobilize and utilize all kinds of resources to meet the objectives clearly set as
part of the planning process. Managing well depends on internal and external
factors, the latter include availability, cost effectiveness; technological
advancement. Increasingly, revelations of deterioration in quality and transparency,
have called for adoption of internationally accepted ‘Best Practices’. The
acceptance of the concept gave rise to ‘Corporate Governance’. ‘Corporate
Governance’ encompasses commitment to values and to ethical business conduct
to maximize shareholder values on a sustainable basis, while ensuring fairness to
all stakeholders including customers, employees, and investors, vendors,
Government and society at large. Corporate Governance is the system by which
companies are directed and managed. It influences how the objectives of the
company are set and achieved, how risk is monitored and assessed and how
performance is optimized. Sound Corporate Governance is therefore critical to
enhance and retain investors’ trust.
The very definition of corporate governance stems from its organic link with the
entire gamut of activities having a direct or indirect influence on the financial
health of corporate entities. The Cadbury Report (1992) simply describes
Corporate Governance as ‘the system by which companies are directed and
controlled’. So far as corporate governance is concerned, it is financial integrity
that assumes tremendous importance. This would mean that the directors and all
concerned should be open and straight/forthright about issues where there is
conflict of interest involved in financial decision making. When it comes to even
the purchase/procurement procedures, there is need for greater transparency.
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encompass not only the control rights of stockholders, but also the contractual
covenants and insolvency powers of the debt holders, the commitments towards
employees, customers and suppliers, the regulations and the statutes. In addition,
the firm’s decisions are powerfully affected by competitive conditions in the
various markets in which it operates. Despite the various attempts to define
corporate governance and its elements, there is no single model of good corporate
governance. Although the general principles are widely accepted, they are not set
in concrete and must be adjusted to reflect the specific circumstances and needs of
individual organizations.
The Business Roundtable states:
“Good corporate governance is not a ‘one size fits all proposition, and a wide
diversity of approaches to corporate governance should be expected and entirely
appropriate. Moreover, a corporation’s practices will evolve as it adapts to
changing situations.”
The “one size fits all” approach has also been rejected by the OECD, which,
instead, has advocated the need for pluralism, flexibility and adaptability in
corporate governance.
The OECD has recently reinforced this view and stated that ‘to remain competitive
in a changing world, corporations must innovate and adapt their corporate
governance practices so that they can meet new demands and grasp new
opportunities”.
The Corporate system and diverse ownership did contribute in a substantial
measure to prosperity, employment potential and living standards of the subjects
across the globe. Notwithstanding the contributions, the failures too caused
concerns among the regulators. Existing laws, rules and controls did not adequately
address the issues related to the failures caused by deficient or intentional
fraudulent managements. In USA, the Sarbanes-Oxley Act 2002 was passed to
address the issues associated with corporate failures, achieve quality governance
and restoring ‘investor’ confidence. The Securities and Exchange Commission of
USA initiated action against multinational accounting firms for failure to detect
blatant violation of accounting standards, and penalities running to several million
dollars were recovered, from certain multinational consultancy firms.
The increasing concern of the foreign investors is that the enterprise in which they
invest should not only be effectively managed but should also observe the
principles of corporate governance. In other words, the enterprises will not do
anything illegal or unethical. This need for re-assurance is felt by the FIIs due to
the fact that there have been cases of dramatic collapse of enterprises which were
apparently doing well but which were not observing the principles of corporate
governance.
Studies in India and abroad show that markets and investors take notice of well
managed companies respond positively to them and reward such companies with
higher valuations.
Clause 49 Stock Exchange Listing Agreements (“Listing
Agreements”), SEBI ACT
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Securities and Exchange Board of India constituted a Committee on Corporate
Governance under the Chairmanship of Mr. Kumar Mangalam Birla. The
committee observed that there are companies, which have set high standards of
governance while there are many more whose practices are matters of concern.
There is increasing concern about standards of financial reporting and
accountability especially after losses are suffered by investors and leaders in the
recent past, which could have been avoided with better and more transparent
reporting practices. Companies raise capital from market and investors suffered
due to unscrupulous managements that performed much worse than past reported
figures. Bad governance was also exemplified by allotment of promoters’ share at
preferential prices disproportionate to market value, affecting minority holders’
interests. Many corporates did not pay heed to investors’ grievances. While there
were enough rules and regulations to take care of grievances, yet the inadequate
implementation and the absence of severe penalty left much to be desired.
(iv) Independent directors not to have material or pecuniary relations with the
Company / subsidiaries and if had, to disclose in Annual Report.
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(vii) Optimum combination of not less than 50% of non-executive directors and
of which companies with non-executive Chairman to have at least one third of
independent directors and under executive Chairman at least one half of
independent directors.
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DIRECTORS RESPONSIBILITY
The following major responsibilities of the board of directors reflect the broad
purposes of governance:
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INSIDER TRADING
SHAREHOLDERS
The shareholders are the owners of the company and as such they have certain
rights and responsibilities. But in reality companies cannot be managed by
shareholder referendum. The shareholders are not expected to assume
responsibility for the management of corporate affairs. A company’s management
must be able to take business decisions rapidly. The shareholders have therefore to
necessarily delegate many of their responsibilities as owners of the company to the
directors who then become responsible for corporate strategy and operations. The
implementation of this strategy is done by a management team. This relationship
therefore brings in the accountability of the boards and the management to the
shareholders of the company. A good corporate framework is one that provides
adequate avenues to the shareholders for effective contribution in the governance
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of the company while insisting on a high standard of corporate behavior without
getting involved in the day to day functioning of the company.
The basic rights of the shareholders include right to transfer and registration of
shares, obtaining relevant information on the company on a timely and regular
basis, participating and voting in shareholder meetings, electing members of the
board and sharing in the residual profits of the corporation.
A company must have appropriate systems in place which will enable the
shareholders to participate effectively and vote in the shareholders’ meetings. The
company should also keep the shareholders informed of the rules and voting
procedures, which govern the general shareholder meetings. The annual general
meetings of the company should not be deliberately held at venues or the timing
should not be such which makes it difficult for most of the shareholders to attend.
The company must also ensure that it is not inconvenient or expensive for
shareholders to cast their vote.
Currently, although the formality of holding the general meeting is gone through,
in actual practice only a small fraction of the shareholders of that company do or
can really participate therein. This virtually makes the concept of corporate
democracy illusory. It is imperative that this situation which has lasted too long
needs an early correction. In this context, for shareholders who are unable to attend
the meetings, there should be a requirement which will enable them to vote by
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postal ballot for key decisions. This would require changes in the Companies Act.
The Committee was informed that SEBI has already made recommendations in this
regard to the Department of Company Affairs. The Committee believes that the
General Body Meetings provide an opportunity to the shareholders to address their
concerns to the board of directors and comment on and demand any explanation on
the annual report or on the overall functioning of the company. It is important that
the shareholders use the forum of general body meetings for ensuring that the
company is being properly stewarded for maximising the interests of the
shareholders. This is important especially in the Indian context. It follows from the
above that for effective participation shareholders must maintain decorum during
the General Body Meetings.
The effectiveness of the board is determined by the quality of the directors and the
quality of the financial information is dependent to an extent on the efficiency with
which the auditors carry on their duties. The shareholders must therefore show a
greater degree of interest and involvement in the appointment of the directors and
the auditors. Indeed, they should demand complete information about the directors
before approving their directorship.
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A company should:
1. Lay solid foundations for management and oversight, recognise and publish the
respective roles and responsibilities of board and management.
2. Structure the board to add value - Have a board of an effective composition, size
and commitment to adequately discharge its responsibilities and duties.
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Traditionally the matters with corporate sector were involved with esoteric branch
of commercial law. Limited generally to a narrow view of how to ensure the
managers follow the interests of shareholders. Basic standards of Corporate
Governance structure and processes have been slowly evolving over last two
decades. Traditionally it was observed only in respect of the operation of market
pressure.
Looking beyond India the scenario in general is different. In the country like U.S.
and U.K. there is an active market for corporate control to discipline managers, if
they fail to maximize shareholders wealth. They largely adopted three main
instruments they are- "Proxy Contests". Friendly mergers and Hostile takeover.
The first among the above said there is considered more effective Friendly mergers
have hardly succeeded to solve the "agency problem". While takeover is not
appealing strongly on the ground of heavy cost incurred in it and also for want of
political will conducive to the policy. In Germany and Japan the system that
prevails in U.K. and U.S. is absent. Unlike that system there is "Banking
Supervision". The main bank financing the corporate unit acts as an external
control mechanism. In such case very least intervention is found and that only
when financial problem arises. It is in light of these experiences that innovative
approach to the concept is formed. Several credit rating agencies have stepped in
the market and they are offering services of the kind, which meets with the Quality
of Governance in corporate entities.
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For calculation of corporate governance score the author has used the six major
variables, which are then divided into sub components. Weights are assigned to
each of these components. (As shown in Table 1). The variables and weights have
been taken after careful study of existing literature. The CG Score has been
calculated by assigning to each variable component points on a 5 to 1 Linker’s
Point scale.
Table 1
a) Audit Committee 6%
b) Remuneration Committee 6%
c) Nominations Committee 5%
3) Transparency (20%)
a) Ownership Structure 9%
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b) Takeover Defences 6%
a) Credit Rating 4%
c) Social Responsibility 3%
Case I
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CORPORATE GOVERNANCE PRACTICES IN INFOSYS
TECHNOLOGIES LTD.
Infosys was incorporated in 1981 with the vision of building a globally respected
corporation – a vision that has translated into a strong organization commitment
towards discipline, fair play and good corporate governance. Infosys was the first
Indian company to emphasise on strong corporate governance practices in India.
The company expanded its corporate governance practices significantly beyond
what was required by the letter of the law. It voluntarily complied with the US
GAAP accounting requirements, and was the first company to prepare financial
statements in compliance with the GAAP requirements of eight countries. The
company was also among the first in the country to incorporate a number of
innovative disclosures in its financial reporting, including human resources
valuation, brand valuation, value-added statement and EVAR report ‘Integrity,
fairness and transparency across its operations’ has been the main mantra for
Infosys.
Infosys emphasizes its commitment to a strong value system and corporate
governance practices, by making this and integral part of the training of every
employee. Infosys was a pioneer in inducting independent directors to its Board,
thus greatly strengthening Board oversight of senior management in the company.
Over the years, the management emphasized continuous dialogue with its investors
and placed a high priority on investor relations and feedback. For example, Infosys
early investments in stock markets ended as soon as it was apparent that investors
felt that these added no value. Infosys focus on corporate governance not only
brought global visibility to the company but also created pressure on other Indian
firms to raise their governance standards. This led to an encouragement trend of
companies across industries scaling up their corporate governance standards and
going beyond mandatory requirements.
Infosys believes that good corporate governance must also translate into being a
responsible corporate citizen. The senior executives of Infosys have also served on
various task forces set up by the Indian government to develop meaningful
corporate governance codes and ethical industry practices. Over the last 25 years,
Infosys has remained committed to being ethical, sincere and open in its dealings
with all its stakeholders. It has enabled the company to build an organization that is
trusted and admired not just in India but also by companies across the world. Its
disclosure standards, detailed segmental data, presentation of accounts as per
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GAAP of eight countries, detailed cost break-ups – are among the best in the
industry. Infosys also provides the most detailed manpower data- very important in
its space. Age profiles, experience, education levels and gender mix are all
elaborated in detail. Infosys is one of the very few companies in India to have a
nomination committee, which provides training to its non-executive directors and
appraises their performance. Where Infosys loses out is on the issue of stock
options, high cash levels impacting return ratios and a relatively large board with
about 15 board members. Corporate governance has emerged as the foundation of
successful companies both in India and globally. Today shareholders, institutional
investors, lenders and other stakeholders demand more information on the
capability and integrity of boards and management of companies they deal with
and the processes these companies follow.
They believe that sound corporate governance is critical to enhance and retain
stakeholders' trust. Accordingly, they always seek to ensure that they attain their
performance rules with integrity. Their Board exercises its fiduciary
responsibilities in the widest sense of the term. Their disclosures always seek to
attain best practices in international corporate governance. They also endeavor to
enhance long-term shareholder value and respect minority rights in all our business
decisions.
1. Satisfy the spirit of the law and not just the letter of the law. Corporate
governance standards should go beyond the law .
2. Be transparent and maintain a high degree of disclosure levels. When in
doubt, Disclose.
3. Make a clear distinction between personal conveniences and corporate
resources.
4. Communicate externally, in a truthful manner, about how the Company is
run internally.
5. Comply with the laws in all the countries in which we operate.
6. Have a simple and transparent corporate structure driven solely by business
needs.
7. Management is the trustee of the shareholders' capital and not the owner.
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Corporate Governance Ratings.
As a part of their commitment to follow global best practices, they comply with the
Euro shareholders Corporate Governance Guidelines, 2000, and the
recommendations of The Conference Board Commission on Public Trusts and
Private Enterprises in the U.S. They also adhere to the UN Global Compact
Programme.
CG Score & Company Valuation.
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Taking into account the above variables and studying the corporate governance of
the company in detail we got the following scores for Infosys Technologies Ltd.
( The details of the scores are given in the table below)
Corporate Governance Score of Infosys Technologies (2002-2007)
Following table shows the CG score, Market Capitalization and Enterprise Value
of Infosys Technologies Ltd.
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Period 2007 2006 2005 2004 2003 2002
Market Capitalisation (in Rs. Cr) 115307 82154 61073 32909 26847 24654
Enterprise Value(in Rs. Cr) 109657 78375 59390 31070 25208 23627
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A moderate positive correlation has been established between CG and dividend
payout. It signifies that better CG though leads to better operating performance but
does not necessarily mean high payout to shareholders.
Profit after Tax in Rs. (Cr.) 3777 2421 1859 1243 958 808
Income (Turnover in Rs. Cr) 13149 9028 6860 4761 3623 2654
Results of Correlation : Correlation with profit after tax is +0.83 and with
turnover is +0.86.
Turnover proxy of Firm size is positively correlated with good corporate
governance practices. High positive correlation between PAT also suggests that
better corporate governance practices result in better operating performance.
Coefficient of determination confirms the inferences drawn from the coefficient of
correlation. One can argue that even with the highest estimates of financial
fundamentals one can achieve the same growth in value by more than twice sales
growth or 35% increase in financial results demands more efforts compared to
corporate governance practices improvement leading to the same value growth.
But again improving the performance is related with profitability, which in turn is
the return of brand image. Therefore, the brand is the practical reason for
improving the governance.
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Summary and Conclusions
The relation between corporate governance and organizational performance is of
fundamental importance to practitioners, academics and policy makers.
Assumptions and strongly held beliefs about the importance of governance are
shaping the current regulatory climate for the design of governance structures. In
this study, we have developed through a comprehensive analysis a very high
positive relationship between level of Corporate Governance and market valuations
of the company which indicates that superior governance results in better
valuations. Companies with high governance rankings enjoy superior market
premiums.
To sum up:
1. We find that better corporate governance is associated with higher operating
performance and higher valuations.
2. Firms could improve investors wealth and protection rights by increasing
disclosure, selecting well-functioning and independent boards, imposing
disciplinary mechanisms.
3. These results are consistent with results found in Gompers et al. (2001),
which find that firms with stronger corporate governance have relatively
higher wealth creation in the US.
4. Better Corporate Governance leads to value creation for all the stakeholders.
Good governance requires a mindset within the corporation, which integrates the
corporate code of ethics into the day-to-day activities of its managers and workers.
As the sociologists Rossouw and van Vuuren note, companies must move from the
“reactive and compliance mode” of corporate ethics, to the “integrity mode”,
where the functions of the entire organization are completely aligned with its value
system.
CASE II
CORPORATE GOVERNANCE PRACTICES IN ITC LTD.
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ITC is one of India's foremost private sector companies with a market
capitalisation of nearly US $ 18 billion and a turnover of over US $ 5.1 Billion.
ITC is rated among the World's Best Big Companies, Asia's 'Fab 50' and the
World's Most Reputable Companies by Forbes magazine, among India's Most
Respected Companies by Business World and among India's Most Valuable
Companies by Business Today. ITC ranks among India's `10 Most Valuable
(Company) Brands', in a study conducted by Brand Finance and published by the
Economic Times. ITC also ranks among Asia's 50 best performing companies
compiled by Business Week.
Over the years, ITC has evolved from a single product company to a multi-
business corporation. Its businesses are spread over a wide spectrum, ranging from
cigarettes and tobacco to hotels, packaging, paper and paperboards and
international commodities trading. Each of these businesses is vastly different from
the others in its type, the state of its evolution and the basic nature of its activity,
all of which influence the choice of the form of governance. The challenge of
governance for ITC therefore lies in fashioning a model that addresses the
uniqueness of each of its businesses and yet strengthens the unity of purpose of the
Company as a whole.
Since the commencement of the liberalisation process, India's economic scenario
has begun to alter radically. Globalisation will not only significantly heighten
business risks, but will also compel Indian companies to adopt international norms
of transparency and good governance. Equally, in the resultant competitive
context, freedom of executive management and its ability to respond to the
dynamics of a fast changing business environment will be the new success factors.
ITC's governance policy recognises the challenge of this new business reality in
India.
ITC has won the Golden Peacock Awards for 'Corporate Social Responsibility
(Asia)' in 2007, the Award for ‘CSR in Emerging Economies
2005’ and ‘Excellence in Corporate Governance' in the same year. These
Awards have been instituted by the Institute of Directors, New Delhi, in
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association with the World Council for Corporate Governance and Centre for
Corporate Governance
CORE PRINCIPLES
ITC's Corporate Governance initiative is based on two core principles. These are :
i. Management must have the executive freedom to drive the enterprise
forward without undue restraints; and
ii. This freedom of management should be exercised within a framework of
effective accountability.
ITC believes that any meaningful policy on Corporate Governance must provide
empowerment to the executive management of the Company, and simultaneously
create a mechanism of checks and balances which ensures that the decision making
powers vested in the executive management is not only not misused, but is used
with care and responsibility to meet stakeholder aspirations and societal
expectations.
Cornerstones
From the above definition and core principles of Corporate Governance emerge the
cornerstones of ITC's governance philosophy, namely trusteeship, transparency,
empowerment and accountability, control and ethical corporate citizenship. ITC
believes that the practice of each of these leads to the creation of the right
corporate culture in which the company is managed in a manner that fulfils the
purpose of Corporate Governance.
Trusteeship :
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ITC believes that large corporations like itself have both a social and economic
purpose. They represent a coalition of interests, namely those of the shareholders,
other providers of capital, business associates and employees. This belief therefore
casts a responsibility of trusteeship on the Company's Board of Directors. They are
to act as trustees to protect and enhance shareholder value, as well as to ensure that
the Company fulfill its obligations and responsibilities to its other stakeholders.
Inherent in the concept of trusteeship is the responsibility to ensure equity, namely,
that the rights of all shareholders, large or small, are protected.
Transparency :
ITC believes that transparency means explaining Company's policies and actions to
those to whom it has responsibilities. Therefore transparency must lead to
maximum appropriate disclosures without jeopardising the Company's strategic
interests. Internally, transparency means openness in Company's relationship with
its employees, as well as the conduct of its business in a manner that will bear
scrutiny. We believe transparency enhances accountability.
Control :
ITC believes that control is a necessary concomitant of its second core principle of
governance that the freedom of management should be exercised within a
framework of appropriate checks and balances. Control should prevent misuse of
power, facilitate timely management response to change, and ensure that business
risks are pre-emptively and effectively managed.
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ITC believes that corporations like itself have a responsibility to set exemplary
standards of ethical behaviour, both internally within the organisation, as well as in
their external relationships. We believe that unethical behaviour corrupts
organisational culture and undermines stakeholder value.
Roles
The core roles of the various entities at the three levels of Corporate Governance
will be as follows:
Board of Directors (Board) :
The primary role of the Board of Directors is that of trusteeship to protect and
enhance shareholder value through strategic supervision of ITC, its wholly owned
subsidiaries and their wholly owned subsidiaries. As trustees they will ensure that
the Company has clear goals relating to shareholder value and its growth. They
should set strategic goals and seek accountability for their fulfillment. They will
provide direction, and exercise appropriate control to ensure that the Company is
managed in a manner that fulfills stakeholder aspirations and societal expectations.
The Board must periodically review its own functioning to ensure that it is
fulfilling its role.
The ITC Board will be a balanced Board, consisting of Executive and Non-
Executive Directors, the latter including independent professionals. Executive
directors, including the Executive Chairman, shall not generally exceed 1/3rd of
the total strength of the Board. The Non-Executive Directors shall comprise
eminent professionals, drawn from amongst persons with experience in business /
finance / law / public enterprises. Directors shall be appointed / re-appointed for a
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period of three to five years, and in the case of Executive Directors up to the date
of their retirement, whichever is earlier. The Board shall determine from time to
time the retirement age for both Executive and Non-Executive Directors. The
Board shall specify the maximum number of company Directorships which can be
held by members of the ITC Board.
Non-Executive Directors are expected to play a critical role in imparting balance to
the Board processes by bringing an independent judgement to bear on issues of
strategy, performance, resources, standards of Company conduct, etc.
The Board shall meet at least six times a year and as far as possible meetings will
be held once in two months. The annual calendar of meetings shall be agreed upon
at the beginning of each year. As laid down in the Articles of Association of the
Company, the quorum for meetings shall be one third of members and decisions
shall be taken by simple majority, unless statutorily required otherwise. Meetings
shall be governed by a structured agenda. All major issues included in the agenda
shall be backed by comprehensive background information to enable the Board to
take informed decisions. Agenda papers, as far as practicable, shall be circulated at
least three working days prior to the meeting. Normally items for the Board
Agenda, except those emanating from Board Committees, shall have been
examined by the CMC. Minutes shall be circulated within 15 working days of the
meeting and confirmed at the next meeting. Board decisions shall record the
related logic as far as practicable.
The Board shall have the following Committees whose terms of reference shall be
determined by the Board from time to time :
Audit Committee : To provide assurance to the Board on the adequacy of internal
control systems and financial disclosures. The Head of Internal Audit will act as
coordinator to the Audit Committee, but will be administratively under the control
of the Director accountable to the Board for the Finance function.
Compensation Committee : To recommend to the Board compensation terms for
Executive Directors and the senior most level of management below the Executive
Directors.
Nominations Committee : To recommend to the Board nominations for
membership of the CMC and the Board, and oversee succession for the senior most
level of management below the Executive Directors.
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Investor Services Committee : To look into redressal of shareholder and investors
grievances, approval of transmissions, sub-division of shares, issue of duplicate
shares, etc.
Terms of Reference of the Board Committees shall include :
Objectives, Role, Responsibilities
Authority / Powers
Membership & Quorum
Chairmanship
Tenure
Frequency of Meetings
The composition of these Committees will be as follows :-
Committee Members Chairman
Audit Directors of the Company, as may be One of the
Committee decided by the Board, with not less than 3 Independent
members, all being Non-Executive Directors, to be
Directors with majority of them being determined by the
independent; and with at least one Board.
Director having financial and accounting
knowledge. The Director accountable to
the Board for the Finance function, Head
of Internal Audit and representative of
External Auditors shall be the Permanent
Invitees with the Company Secretary to
act as the Secretary.
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Nominations The Executive Chairman and all the Non- Executive Chairman.
Committee Executive Directors.
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Agenda papers, as far as practicable, shall be circulated at least three days prior to
the meeting. The CMC shall normally meet once a month.
Executive Director :
a) As a member of the CMC, contribute to the strategic management of the
Company's businesses within Board approved direction / framework.
b) As Director accountable to the Board for a business (Line Director), assume
overall responsibility for its strategic management, including its governance
processes and top management effectiveness.
c) As Director accountable to the Board for a wholly owned subsidiary, or its
wholly owned subsidiary (Line Director), act as the custodian of ITC's interest and
be responsible for their governance in accordance with the charter approved by the
Board.
d) As Director accountable to the Board for a particular corporate function (Line
Director), assume overall strategic responsibility for its performance.
Divisional Management Committee (DMC) :
Executive management of the divisional business to realise tactical and strategic
objectives in accordance with CMC / Board approved plan. Composition of the
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DMC shall be determined by the Line Director with the approval of the CMC. The
Divisional CEO shall convene and chair the DMC meetings. If the Divisional
CEO, for any reason, is not in a position to convene a required DMC meeting, he
shall in writing delegate the power to convene and chair the required meeting to
one of the DMC members identified by name. Such delegation should be either for
a specific meeting or for meetings to be held during a specific period of time. It
cannot be a general, open-ended delegation. The key functions of the Division
shall be represented on the DMC. Normally the Divisional Financial Controller, in
addition to being a member, shall act as the Secretary to the DMC and will be
responsible for circulation and custody of agenda notes and minutes. The DMC
shall generally meet at least once a month to review Divisional performance and
related issues. Quorum for meetings shall be 50% of the members subject to a
minimum of three members. Decisions will be taken by simple majority. Minutes
of meetings shall be tabled before the CMC for its information. Agenda items shall
be backed by comprehensive notes from the relevant member / invitee. Agenda
papers, as far as practicable, shall be circulated at least three days prior to the
meeting.
Divisional CEO :
The Divisional CEO shall function as the Chief Operating Officer with executive
responsibility for day-to-day operation of the Divisional business, and shall
provide leadership to the Divisional Management Committee in its task of
executive management of the Divisional business.
CONCLUSION
It is ITC's belief that the right balance between freedom of management and
accountability to shareholders can be achieved by segregating strategic supervision
from strategic and executive management. The Board of Directors (Board) as
trustees of the shareholders will exercise strategic supervision through strategic
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direction and control, and seek accountability for effective strategic management
from the Corporate Management Committee (CMC). The CMC will have the
freedom, within Board approved direction and framework, to focus its attention
and energies on the strategic management of the Company. The Divisional Chief
Executive, assisted by the Divisional Management Committee, will have the
freedom to focus on the executive management of the divisional business.
The 3-tier governance structure thus ensures that :
a. Strategic supervision (on behalf of the shareholders), being free from
involvement in the task of strategic management of the Company, can be
conducted by the Board with objectivity, thereby sharpening accountability of
management.
b. Strategic management of the Company, uncluttered by the day-to-day tasks
of executive management, remains focused and energised; and
c. Executive management of the divisional business, free from collective
strategic responsibilities for ITC as a whole, gets focused on enhancing the quality,
efficiency and effectiveness of its business.
BIBLIOGRAPHY
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http://en.wikipedia.org/wiki/Corporate_governance
www.indianmba.com
www.managementparadise.com
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EPILOGUE
The most important aspect for observing corporate governance is the top
management, particularly the board of directors and the senior level management
of an enterprise - walking their talk. It is by walking their talk that the top
management can earn credibility. This also has a direct bearing on the morale of an
organisation.
With the SEBI trying to bring some discipline in the stock market especially in
terms of greater transparency and disclosure norms, corporate governance in the
Indian context at least seems to focus primarily and rightly on the issue of
transparency. It is lack of transparency that leads to corrupt or illegal behaviour. If
corporate governance is concerned with better ethics and principles, it is only
natural that the focus should be on transparency. But how is this transparency to be
achieved? One method of course is the code. Another would be the regulatory
authorities like SEBI, RBI etc. laying down guidelines so that a certain degree of
transparency is automatically ensured. Another legal approach to achieve better
corporate governance may be to look at the whole issue of bringing the corporate
sector under the discipline of debt and equity. Perhaps amendment of the
Companies Act and bringing in this discipline will also help in automatically
ensuring better ethics and corporate governance.
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Perhaps the most important challenge we face towards better corporate governance
is the mindset of the people and the organisational culture. This change will have
to come from within. The government or the regulatory agencies at best can
provide certain environment, which will be conducive for such a mindset taking
place, but the primary
responsibility, is of the people especially the members of the board of directors and
the top management.
We then come to a common moral problem in running enterprises. One can have
practices which are legal but which are unethical. In fact, many a time, tax
planning exercises may border on the fine razor’s edge between the strictly legal
and the patently unethical. A clear understanding of the fundamental values which
govern corporate governance and their explicit articulation in a proper code backed
by well established structures and traditions like the ethics committee and audit
committee may be the best insurance for good corporate governance under the
circumstances.
Corporate governance extends beyond corporate law. Its objective is not mere
fulfillment of legal requirements but ensuring commitment on managing
transparently for maximising shareholder values. As competition increases,
technology pronounces the deal of distance and speeds up communication,
environment also changes. In this dynamic environment the systems of Corporate
Governance also need to evolve, upgrade in time with the rapidly changing
economic and industrial climate of the country.
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Finally the key lesson for us to learn are that Regulations and Policies are only one
part of improving governance. Existence of a comprehensive system alone cannot
guarantee ethical pursuit of shareholder’s interest by Directors, officers and
employees. Quality of governance depends upon competence and integrity of
Directors, who have to diligently oversee the management while adhering to
unpeachable ethical standards. Strengthened systems and enhanced transparency
can only further the ability. Transparency about a company’s governance process
is critical. Implementing Corporate Governance structures are Important but
instilling the right culture – work culture is Most Essential.
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Cross Reference Index
Certificate 2
Acknowledgements 3
Prologue 5
Introduction 7,7,8,9
Clause 49 10,11
Directory Responsibility 13
Insider Trading 14
Shareholders 14,14,15
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