CORPORATE GOVERNANCE-TOOLS FOR MAKING CG WORK-

i
By- Dr G.Ramasuramanian

TOOLS ENSURING GOOD CORPORATE GOVERNANCE PRINCIPLES

Introduction: Good corporate Governance ensures a healthy company, and healthy legal system. Good
governance ensures that a company delivers reasonable amount of wealth to its shareholders, fulfill its
financial and other obligations to other stakeholders , within agreed dates . Most importantly they will
red flag issues that can have a material impact and provides ample time to the policy makers to take
appropriate action.

Definition
OECD principles define Corporate Governance as follows: Corporate Governance involves a set of
relationships between a company’s management, its board , its shareholders and other stakeholders. CG
also provides the structure through which the objectives of the company are set, and the means of
attaining these objectives and monitoring performance are determined

Provided herein below, the set of tools that are at the disposal of companies to have good
corporate governance.

A. BOARD OF DIRECTORS: Board of Directors are the highest policy making authority in a
Registered company. Depending on the status of a company, strength of Board of Directors may vary
. Board is entrusted with policy making authority, which ensures that a company builds a good trust
and relationship with its stakeholders. Hence, it is said that Good Corporate Governance begins with
the Board of Directors. Implementation of CG is done by the various senior management down
below, who are delegated this work.
I. Board of Directors
The company agrees that the board of directors of the company shall have an optimum combination
of executive and non-executive directors with not less than fifty percent of the board of directors
comprising of non-executive directors. The number of independent directors would depend whether
the Chairman is executive or non-executive. In case of a non-executive chairman, at least one-third of
board should comprise of independent directors and in case of an executive chairman, at least half of
board should comprise of independent directors.
Explanation: For the purpose of this clause the expression ‘independent directors’ means directors
who apart from receiving director’s remuneration, do not have any other material pecuniary
relationship or transactions with the company, its promoters, its management or its subsidiaries,
which in judgment of the board may affect independence of judgment of the director.
The company agrees that all pecuniary relationship or transactions of the non-executive directors
viz-a-viz. the company should be disclosed in the Annual Report.

B. AUDIT COMMITTEE OF BOD: Audit committee is a very important forum , constituted from
among the Board of Directors. Audit committee determines the various matters that determine a

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 company’s standing. Details of the various matters entrusted to Audit committee are listed in
Annexure 1.
Some important observations of SEBI on Audit Committee:
 The company agrees that a qualified and independent audit committee shall be set up and that
:
 The audit committee shall have minimum three members, all being non-executive directors,
with the majority of them being independent, and with at least one director having financial
and accounting knowledge;
 The chairman of the committee shall be an independent director;
 The chairman shall be present at Annual General Meeting to answer shareholder queries;
 The audit committee should invite such of the executives, as it considers appropriate (and
particularly the head of the finance function) to be present at the meetings of the committee,
but on occasions it may also meet without the presence of any executives of the company.
The finance director, head of internal audit and when required, a representative of the
external auditor shall be present as invitees for the meetings of the audit committee;
 The Company Secretary shall act as the secretary to the committee.
 The audit committee shall meet at least thrice a year. One meeting shall be held before
finalisation of annual accounts and one every six months. The quorum shall be either two
members or one third of the members of the audit committee, whichever is higher and
minimum of two independent directors.

C. KMP: This abbreviation stands for Key Management Personnel. The KMP are the Managing
Director or Whole time Director, or Chief Executive Officer, Chief Financial Officer, Company
Secretary . These three constitute the important pillars in fulfilling the role of implementation
specialists in a compays CG . These are statutory positions and need a great depth of knowledge and
tact in handling these posts. Detailed guidelines on the KMP, and their roles and responsibilities are
provided in annexure -
203. Appointment of key managerial personnel
(1) Every company belonging to such class or classes of companies as may be
prescribed shall have the following whole-time key managerial personnel,—
(i) managing director, or Chief Executive Officer or manager and in their absence,
a whole-time director;
(ii) company secretary; and
(iii) Chief Financial Officer :
Provided that an individual shall not be appointed or reappointed as the chairperson
of the company, in pursuance of the articles of the company, as well as the managing director

D. COMPANIES ACT: The Companies Act 1956 and 2013 form the important base for Good
Governance. If companies, their Boards , KMP follow the Act in letter and spirit, a Companys CG
will improve by leaps and bounds. While this is the endeavor of various companies, the size and
complexity of these conglomerates is a challenge for implementation of good corporate governance
measures.

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E. SHAREHOLDERS MEETINS FORUM : company ownership is spread variously among its
shareholders. These shareholders are spread far and wide. Often some companies take to their benefit
these distances among shareholders and stakeholders . This kind of attitudes result in failure of
Corporate Governance. It is well documented in various cases what is the result of corporate
governance failures. There is will be financial frauds, (some one getting richer at the cost of another),
siphoning off funds from Banks (the Diamond & Jeweller matter) , inability to pay debts in time
(IL&FS case) , loss of money to Banks, (several cases recent being the Diamond merchant matter )
wasting of huge money in trying to bring these frauds to face jail term etc. besides fall in share prices
and loss of wealth to the shareholders , and economy

F. DISCLOSURE NORMS AS PER STOCK EXCHANGE: SEBI has provided various guidelines for
ensuring that there is proper disclosure of material facts and issues , so that all the stakeholders are
aware. When these disclosure norms are followed in letter and spirit, the ensuring corporate
governance failures can be averted. These guidelines help in taking a decision on a matter which is
appropriately disclosed.
1.1

Chart of TOOLS FOR CORPORATE GOVERNANCE

1. Companies Act mentioned above is the Companies Act, 2013.

2. Code of conduct is prepared by the company
3. Statutory audit is mandatory
4. Shareholders participation is through the means of General Meetings
5. Corporate control is exercised byPromoters, the Board of Directors

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 References
ANNEXURE A
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Circulars
SECURITIES AND EXCHANGE BOARD OF INDIA
SECONDARY MARKET DEPARTMENT

SMDRP/POLICY/CIR-10/2000
February 21, 2000
To:

Dear Sir/Madam,
SEBI had constituted a Committee on Corporate Governance under the Chairmanship of Shri Kumar
Mangalam Birla, Member, SEBI Board to promote and raise the standard of Corporate Governance in
respect of listed companies. The SEBI Board in its meeting held on January 25, 2000 considered the
recommendation of the Committee and decided to make the amendments to the listing agreement in
pursuance of the decision of the Board, it is advised that a new clause, namely clause 49, be incorporate in
the listing agreement as under :
49. Corporate Governance
I. Board of Directors
1. The company agrees that the board of directors of the company shall have an optimum combination of
executive and non-executive directors with not less than fifty percent of the board of directors comprising
of non-executive directors. The number of independent directors would depend whether the Chairman is
executive or non-executive. In case of a non-executive chairman, at least one-third of board should
comprise of independent directors and in case of an executive chairman, at least half of board should
comprise of independent directors.
Explanation: For the purpose of this clause the expression ‘independent directors’ means directors who

CHART ON CORPORATE GOVERNANCE TOOLS

apart from receiving director’s remuneration, do not have any other material pecuniary relationship or
transactions with the company, its promoters, its management or its subsidiaries, which in judgement of
the board may affect independence of judgement of the director.
1. The company agrees that all pecuniary relationship or transactions of the non-executive directors viz-a-
viz. the company should be disclosed in the Annual Report.
II Audit Committee.
1. The company agrees that a qualified and independent audit committee shall be set up and that :
1. The audit committee shall have minimum three members, all being non-executive directors, with the
majority of them being independent, and with at least one director having financial and accounting
knowledge;
2. The chairman of the committee shall be an independent director;
3. The chairman shall be present at Annual General Meeting to answer shareholder queries;
4. The audit committee should invite such of the executives, as it considers appropriate (and particularly the
head of the finance function) to be present at the meetings of the committee, but on occasions it may also

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 meet without the presence of any executives of the company. The finance director, head of internal audit
and when required, a representative of the external auditor shall be present as invitees for the meetings of
the audit committee;
5. The Company Secretary shall act as the secretary to the committee.
1. The audit committee shall meet at least thrice a year. One meeting shall be held before finalisation of
annual accounts and one every six months. The quorum shall be either two members or one third of the
members of the audit committee, whichever is higher and minimum of two independent directors.

2. The audit committee shall have powers which should include the following :
1. to investigate any activity within its terms of reference.
2. to seek information from any employee.
3. to obtain outside legal or other professional advice.
4. to secure attendance of outsiders with relevant expertise, if it considers necessary.
1. The company agrees that the role of the audit committee shall include the following.
1. 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.
2. Recommending the appointment and removal of external auditor, fixation of audit fee and also approval
for payment for any other services.
3. Reviewing with management the annual financial statements before submission to the board, focusing
primarily on;

 Any changes in accounting policies and practices.
 Major accounting entries based on exercise of judgement by management.
 Qualifications in draft audit report.
 Significant adjustments arising out of audit.
 The going concern assumption.
 Compliance with accounting standards.
 Compliance with stock exchange and legal requirements concerning financial statements
 Any related party transactions i.e. transactions of the company of material nature, with promoters or the
management, their subsidiaries or relatives etc. that may have potential conflict with the interests of
company at large.
1. Reviewing with the management, external and internal auditors, the adequacy of internal control systems.
2. 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.
3. Discussion with internal auditors any significant findings and follow up there on.
4. Reviewing the findings of any internal investigations by the internal auditors into matters where there is
suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting
the matter to the board.
5. Discussion with external auditors before the audit commences nature and scope of audit as well as have
post-audit discussion to ascertain any area of concern.
6. Reviewing the company’s financial and risk management policies.
7. To look into the reasons for substantial defaults in the payment to the depositors, debenture holders,
shareholders (in case of non payment of declared dividends) and creditors.
1. If the company has set up an audit committee pursuant to provision of the Companies Act, the company
agrees that the said audit committee shall have such additional functions / features as is contained in the
Listing Agreement.
III. Remuneration of Directors

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1. The company agrees that the remuneration of non-executive directors shall be decided by the board of
directors.
2. The company further agrees that the following disclosures on the remuneration of directors shall be made
in the section on the corporate governance of the annual report.

 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.
IV Board Procedure
1. The company agrees that the board meeting shall be held at least four times a year, with a maximum time
gap of four months between any two meetings. The minimum information to be made available to the
board is given in Annexure–I.
2. The company further agrees that a director shall 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. Furthermore it
should be a mandatory annual requirement for every director to inform the company about the committee
positions he occupies in other companies and notify changes as and when they take place.
V. Management
1. The company agrees that 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. This
Management Discussion & Analysis should include discussion on the following matters within the limits
set by the company’s competitive position:
1. Industry structure and developments.
2. Opportunities and Threats.
3. Segment–wise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational performance.
8. Material developments in Human Resources / Industrial Relations front, including number of people
employed.
1. Disclosures must be made by the management to the board relating to all material financial and
commercial transactions, where they have personal interest, that may have a potential conflict with the
interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies,
which have shareholding of management and their relatives etc.)
VI Shareholders
1. The company agrees that in case of the appointment of a new director or re-appointment of a director the
shareholders must be provided with the following information:
1. A brief resume of the director;
2. Nature of his expertise in specific functional areas ; and
3. Names of companies in which the person also holds the directorship and the membership of Committees
of the board.
1. The company further agrees that information like quarterly results, presentation made by companies to
analysts shall be put on company’s web-site, or shall be sent in such a form so as to enable the stock
exchange on which the company is listed to put it on its own web-site.
2. The company further agrees that a board committee under the chairmanship of a non-executive director
shall be formed to specifically look into the redressing of shareholder and investors complaints like

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 transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee
shall be designated as ‘Shareholders/Investors Grievance Committee’.
3. The company further agrees that to expedite the process of share transfers the board of the company shall
delegate the power of share transfer to an officer or a committee or to the registrar and share transfer
agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight.
VII Report on Corporate Governance The company agrees that there shall be a separate section on
Corporate Governance in the annual reports of company, with a detailed compliance report on Corporate
Governance. Non compliance of any mandatory requirement i.e. which is part of the listing agreement
with reasons there of and the extent to which the non-mandatory requirements have been adopted should
be specifically highlighted. The suggested list of items to be included in this report is given in Annexure-
2 and list of non-mandatory requirements is given in Annexure – 3.VIII Compliance The company
agrees that it shall obtain a certificate from the auditors of the company regarding compliance of
conditions of corporate governance as stipulated in this clause and annexe the certificate with the
directors’ report, which is sent annually to all the shareholders of the company. The same certificate shall
also be sent to the Stock Exchanges along with the annual returns filed by the company
.Schedule of Implementation :
The above amendments to the listing agreement have to be implemented as per schedule of
implementation given below:
 By all entities seeking listing for the first time, at the time of listing.
 Within financial year 2000-2001,but not later than March 31, 2001 by all entities, which are included
either in Group ‘A’of the BSE or in S&P CNX Nifty index as on January 1, 2000. However to comply
with the recommendations, these companies may have to begin the process of implementation as early as
possible.
 Within financial year 2001-2002,but not later than March 31, 2002 by all the entities which are presently
listed, with paid up share capital of Rs. 10 crore and above, or networth of Rs 25 crore or more any time
in the history of the company.
 Within financial year 2002-2003,but not later than March 31, 2003 by all the entities which are presently
listed, with paid up share capital of Rs.3 crore and above
 As regards the non-mandatory requirement given in Annexure - 3, they shall be implemented as per the
discretion of the company. However, the disclosures of the adoption/non-adoption of the non-mandatory
requirements shall be made in the section on corporate governance of the Annual Report.
Yours faithfully,

Encl. : Annexures. (source SEBI.GOV.IN)

Annexure 1
Information to be placed before board of directors
1. Annual operating plans and budgets and any updates.
2. Capital budgets and any updates.
3. Quarterly results for the company and its operating divisions or business segments.
4. Minutes of meetings of audit committee and other committees of the board.
5. The information on recruitment and remuneration of senior officers just below the board level, including
appointment or removal of Chief Financial Officer and the Company Secretary.
6. Show cause, demand, prosecution notices and penalty notices which are materially important
7. Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.
8. Any material default in financial obligations to and by the company, or substantial non-payment for goods
sold by the company.

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9. Any issue, which involves possible public or product liability claims of substantial nature, including any
judgement or order which, may have passed strictures on the conduct of the company or taken an adverse
view regarding another enterprise that can have negative implications on the company.
10. Details of any joint venture or collaboration agreement.
11. Transactions that involve substantial payment towards goodwill, brand equity, or intellectual property.
12. Significant labour problems and their proposed solutions. Any significant development in Human
Resources/ Industrial Relations front like signing of wage agreement, implementation of Voluntary
Retirement Scheme etc.
13. Sale of material nature, of investments, subsidiaries, assets, which is not in normal course of business.
14. Quarterly details of foreign exchange exposures and the steps taken by management to limit the risks of
adverse exchange rate movement, if material.
15. Non-compliance of any regulatory, statutory nature or listing requirements and shareholders service such
as non-payment of dividend, delay in share transfer etc.

Annexure 2
Suggested List Of Items To Be Included In The Report On Corporate Governance In The Annual Report
Of Companies
1. A brief statement on company’s philosophy on code of governance.
2. Board of Directors:
 Composition and category of directors for example promoter, executive, non-executive, independent non-
executive, nominee director, which institution represented as Lender or as equity investor.
 Attendance of each director at the BoD meetings and the last AGM.
 Number of other BoDs or Board Committees he/she is a member or Chairperson of.
 Number of BoD meetings held, dates on which held.
1. Audit Committee.
 Brief description of terms of reference
 Composition, name of members and Chairperson
 Meetings and attendance during the year
1. Remuneration Committee.
 Brief description of terms of reference
 Composition, name of members and Chairperson
 Attendance during the year
 Remuneration policy
 Details of remuneration to all the directors, as per format in main report.
1. Shareholders Committee.
 Name of non-executive director heading the committee
 Name and designation of compliance officer
 Number of shareholders complaints received so far
 Number not solved to the satisfaction of shareholders
 Number of pending share transfers
1. General Body meetings.
 Location and time, where last three AGMs held.
 Whether special resolutions
 Were put through postal ballot last year, details of voting pattern.
 Person who conducted the postal ballot exercise
 Are proposed to be conducted through postal ballot
 Procedure for postal ballot
1. Disclosures.

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 Disclosures on materially significant related party transactions i.e. transactions of the company of
material nature, with its promoters, the directors or the management, their subsidiaries or relatives etc.
that may have potential conflict with the interests of company at large.
 Details of non-compliance by the company, penalties, strictures imposed on the company by Stock
Exchange or SEBI or any statutory authority, on any matter related to capital markets, during the last
three years.
1. Means of communication.
 Half-yearly report sent to each household of shareholders.
 Quarterly results
 Which newspapers normally published in.
 Any website, where displayed
 Whether it also displays official news releases; and
 The presentations made to institutional investors or to the analysts.
 Whether MD&A is a part of annual report or not.
1. General Shareholder information
 AGM : Date, time and venue
 Financial Calendar
 Date of Book closure
 Dividend Payment Date
 Listing on Stock Exchanges
 Stock Code
 Market Price Data : High., Low during each month in last financial year
 Performance in comparison to broad-based indices such as BSE Sensex, CRISIL index etc.
 Registrar and Transfer Agents
 Share Transfer System
 Distribution of shareholding
 Dematerialization of shares and liquidity
 Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on
equity
 Plant Locations
 Address for correspondence

Annexure – 3
Non-Mandatory Requirements
1. Chairman of the Board
A non-executive Chairman should be entitled to maintain a Chairman’s office at the company’s expense
and also allowed reimbursement of expenses incurred in performance of his duties.
1. Remuneration Committee
2.
1. The board should set up a remuneration committee to determine on their behalf and on behalf of the
shareholders with agreed terms of reference, the company’s policy on specific remuneration packages for
executive directors including pension rights and any compensation payment.
2. To avoid conflicts of interest, the remuneration committee, which would determine the remuneration
packages of the executive directors should comprise of at least three directors, all of whom should be non-
executive directors, the chairman of committee being an independent director.
3. All the members of the remuneration committee should be present at the meeting.

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4. The Chairman of the remuneration committee should be present at the Annual General Meeting, to
answer the shareholder queries. However, it would be up to the Chairman to decide who should answer
the queries.
c) Shareholder Rights The half-yearly declaration of financial performance including summary of the
significant events in last six-months, should be sent to each household of shareholders.d) Postal
Ballot 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 postal ballot for key decisions.
Some of the critical matters which should be decided by postal ballot are given below :
1.
1. Maters relating to alteration in the memorandum of association of the company like changes in name,
objects, address of registered office etc;
2. Sale of whole or substantially the whole of the undertaking;
3. Sale of investments in the companies, where the shareholding or the voting rights of the company exceeds
25%;
4. Making a further issue of shares through preferential allotment or private placement basis;
5. Corporate restructuring;
6. Entering a new business area not germane to the existing business of the company;
7. Variation in rights attached to class of securities;
8. Matters relating to change in management
ANNEXURE B
203. Appointment of key managerial personnel
(1) Every company belonging to such class or classes of companies as may be
prescribed shall have the following whole-time key managerial personnel,—
(i) managing director, or Chief Executive Officer or manager and in their absence,
a whole-time director;
(ii) company secretary; and
(iii) Chief Financial Officer :
Provided that an individual shall not be appointed or reappointed as the chairperson
of the company, in pursuance of the articles of the company, as well as the managing director
or Chief Executive Officer of the company at the same time after the date of commencement
of this Act unless,—
(a) the articles of such a company provide otherwise; or
(b) the company does not carry multiple businesses:
Provided further that nothing contained in the first proviso shall apply to such class of
companies engaged in multiple businesses and which has appointed one or more Chief
Executive Officers for each such business as may be notified by the Central Government.
(2) Every whole-time key managerial personnel of a company shall be appointed by
means of a resolution of the Board containing the terms and conditions of the appointment
including the remuneration.
(3) A whole-time key managerial personnel shall not hold office in more than one

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company except in its subsidiary company at the same time:
Provided that nothing contained in this sub-section shall disentitle a key
managerial personnel from being a director of any company with the permission of the
Board:
Provided further that whole-time key managerial personnel holding office in more than
one company at the same time on the date of commencement of this Act, shall, within a period
of six months from such commencement, choose one company, in which he wishes to
continue to hold the office of key managerial personnel:
Provided also that a company may appoint or employ a person as its managing director,
if he is the managing director or manager of one, and of not more than one, other company
and such appointment or employment is made or approved by a resolution passed at a
meeting of the Board with the consent of all the directors present at the meeting and of which
meeting, and of the resolution to be moved thereat, specific notice has been given to all the
directors then in India.
(4) If the office of any whole-time key managerial personnel is vacated, the resulting
vacancy shall be filled-up by the Board at a meeting of the Board within a period of six
months from the date of such vacancy.
(5) If a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees and every director and key managerial personnel of the company who is in default shall be
punishable with fine which may extend to fifty thousand rupees and where the contravention is a
continuing one, with a further fine which may extend to one thousand rupees for every day after the first
during which the contravention continues.

Source: SEBI website.(www.sebi.gov.in)

IMPORTANT COMMITTEE REPORTS ON CORPORATE GOVERNANCE THAT HAVE BEEN

CONSIDERED FOR IMPLEMENTING CG IN INDIA
1. CADBURY COMMITTEE REPORT ENGLAND IN 1992
2. KING COMMITTEE REPORT –SOUTH AFRICA IN 1994 AND 2002
3. CII INDIA REPORT ON CORPORATE GOVERNANCE 1996
4. HAMPEL REPORT ENDLAND 1998
5. KUMAR MANGALAM REPORT OF CORPORATE GOVERNANCE INDIA 2000\
6. NARESH CHANDRA COMMITTEE REPORT ON CORPORATE GOVERNANCE
2002
7. N.R.NARAYANA MURTHY REPORT 2O03

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i
GR Advisors, (gopalkannan58@gmail.com)

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