Corporate Governance

Contents :
  • Meaning and Definition of Corporate Governance.
  • Elements of Corporate Governance.
  • CEO/ CFO Certification.
  • Report on Corporate Governance.
  • Verification of Compliance of Corporate Governance.

What is meant by Corporate Governance ?

Meaning of  Corporate Governance :


Corporate governance is the set of processes, customs, policies, law, and institutions affecting the way a corporation/ company is directed, administered or controlled. It also includes the relationships among the many stockholders involved and the goals for which the corporation in governed. It is a multi-faceted subject. An important theme of corporate governance is to ensure the accountability of certain individuals in an organisation through mechanisms that try to reduce or eliminate the principle-agent problem. It is generally understood as the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.

Definitions of  Corporate Governance :


Corporate governance is a broad concept and has been defined by different groups and at different points of time. The definitions of corporate governance are given below:

According to The Cadbury Committee Report:
"Corporate governance is the system by which companies are directed and controlled".

According to Gabrielle O'Donovan:
"Corporate governance is an internal system encompassing policies, processes and people, which serve the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity, accountability and integrity. Sound Corporate governance is reliant on external market place commitment and legislation, plus a healthy broad culture which safeguards policies and processes".

According to Report of SEBI Committee (India) on Corporate governance:
"Corporate governance is the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustee on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company".

According to ICAI:
Corporate governance is an embedded configuration of values, expected and appropriate and expected behavior which provides and co-ordinates for organisation's performance of its role as an entity of society, in all its aspects. A code of Corporate governance makes explicit both the auditable and desirable aspects of such configuration".

Elements of Corporate Governance :


The elements of good corporate governance given below :

1) System of Management :
Corporate governance is a system of management of company. It has three key elements i.e. transparency accountability and merit based decision making.

2) Inclusion :
It includes structuring operation and control of a company to meet collective objectives to benefit all stakeholders, namely, shareholders creditors, employees, customers, suppliers and Govt.

3) Sensitivity :
It is sensitive to beliefs norms, regulations, customs and conventions of society and ensures that its behavior satisfies local community needs and environmental concerns.

4) Mixture :
It is mix of auditable and desirable activities.

Chief Executive Officer (CEO) and Chief Financial Officer (CFO) Certification :


The governance landscape has been irrevocably changed. Over the past few years, reforms in the regulatory environment have a set high standard for public companies to fulfill. More than ever before, the on us is on companies and their executives particularly CEOs, and CFOs to ensure that their financial reporting is transport and accountable.
It has become important to enforce corporate governance to protect investors interest. The SEBI has added a new clause 49 to the Listing Agreement, Part V of clause 49 contains the requirement of CEO/CFO certification. It is as follows :

i) Review of Financial and Cash Flow Statements :
The CEOs/ CFOs have to review the financial statements and the cash flow statements of the company for that particular accounting year. After reviewing them, they have to certify that the statement do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading. They also have to certify that these statements together present a true and fair view of the company's affairs and are in compliance with existing accounting standards, applicable laws and regulations.

ii) Certification about Transactions :
The CEOs / CFOs have to certify that to the best of their knowledge and belief no transactions entered into by the company during that year which is fraudulent, illegal or violating of the books' code of control.

iii) Responsibility :
They have to certify that they accept responsibility for establishment and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company. They also have to specify that they have disclosed to the auditors and the audit committee, deficiencies in the design or operation of the internal control if any of which they are aware of the purpose to take to rectify deficiencies. It means that they have to disclosed to the auditors and audit committee deficiencies in design or operation of internal control.

iv) information to the Auditors or the Audit Committee :
They have to specify that they have indicated to the auditors and the audit committee about any significant changes in internal control over the financial reporting during that year or significant changes in accounting policies during the year and same has been disclosed in the notes to the financial statement. In the same way they have to certify that any instances of significant fraud are shown to the auditors and the audit committee.

Model CEO/ CFO Certificate :
CEO/CFO Certification to the Board :
Under clause 49(V) of the Listing Agreement :


a) We have reviewed the financial statements and cash flow statement for the year ended 31st March, 2009 and to the best of our knowledge and belief :
i) These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading.

ii) these statements together present a true and fair view of the Company S affairs and are in compliance with existing Accounting Standards, applicable laws and regulations.

b) To the best of our knowledge and belief, no transactions entered into by the Company during the year ended 31st March, 2008 are fraudulent, illegal or violating of the Company's code of conduct.

c) We accept responsibility for establishing and maintaining internal controls for financial reporting and we have evaluated the effectiveness of internal control systems of the Company pertaining to financial reporting. Deficiencies in the design or operation of such internal controls, if any, of which we are aware have been disclosed to the Auditors and the Audit Committee and steps have been taken to rectify these deficiencies.

d) i) There has not been any significant change in internal control over financial reporting during the year under reference.
ii) There has not been any significant change in accounting policies during the year except as laid down in Accounting Standards (AS) 15 (revised 2005) on Employee Benefits requiring disclosure in the notes to the financial statements.
iii) We are not aware of any instance during the year of significant fraud with involvement therein of the management or any employee having a significant role in the Company's internal control system over financial reporting.

Report on Corporate Governance :


All companies are required to submit a quarterly compliance report to the Stock exchanges within 15 days from the end of a financial reporting quarter. The report has to be submitted either by the Compliance Officer or by the Chief Executive Officer of the company after obtaining approvals. SEBI has prescribed a format in which the information shall be obtained by the Stock Exchanges from the companies. The companies have to submit compliance status on the following clauses :

i) Board of Directors :
This clause should contain the information about the Board of Directors of the company. It includes the present strength of the Board. It means that the information about composition and category of board is to be given in this clause. It should give information regarding name of directors, categories of the directors and their designation. It should also contain the board procedure details of board meetings and attendance of directors, functioning of board and information of director's appointment or re-appointment.

ii) Audit Committee :
The report must contain the following information regarding the audit committee of the company :

a) Terms of Reference :
This clause contains the information about the terms of reference of audit committee. The basis of formation of the committee is mentioned here.

b) Powers of the Committee :
The report must contain the powers entrusted to audit committee.

c) Composition and Attendance :
The report must state the constitution of the committee. It must show the meetings held during that financial year and the attendance of the members of the committee.

iii) Remuneration Committee :
The report must contain the information about the remuneration committee. It should consists of the terms of reference. Terms of reference may include the appraisal of the performance of chairman, managing director, whole time directors and chief executive officer. It should also mention the remuneration policy of the company. The report must contain the composition of the remuneration committee and the attendance of the members of the committee for the committee meeting.

iv) Shareholder's Investors' Grievance Committee :
The report must contain the information about the Grievance committee established to look into redressal of investors'/ shareholders, complaints and request such as delay in transfer of shares, non receipt of dividend, annual report, re-validation of dividend warrants, etc. It should also mention the composition of the Committee, its meeting and the attendance of thee members. It should also mention the name of the compliance officer for complying with the requirements of SEBI.

v) Code of Conduct and Ethics :
The report should give information about the code of conduct and ethics, if any, for directors and senior management personnel of the company.

vi) General Body Meeting :
The report must contain the information about the details of the general body meetings of the company. It includes the day, date, place, time and numbers of special resolutions passed in the meetings.

vii) Compliance with other Mandatory Requirements :
This clause contains the information about the compliance with other mandatory requirements. They include the following:

Disclosures :
  • Materially significant related party transactions.
  • Disclosure of accounting treatment
  • Disclosure of risk management
  • Utilisation of proceeds from the preferential issue of convertible warrants
  • CEO/ CFO certification
  • Statutory compliance, Penalties and strictures

ix) General Shareholder Information :
it contains the following information :
  • Annual general meeting
  • Financial calendar for the year (tentative).
  • Listing of Securities.
  • Listing of fees to stock exchanges.
  • Custodial fees to Depositories.
  • Stock Code/Symbol.
  • Stock market price data.
  • Share price performance.
  • Share transfer system.
  • Distribution of shareholding as on 31st March
  • Shareholding pattern.
  • Dematerialisation of shares and liquidity.
  • Outstanding GDF/ADR Warrants or any convertible instruments, conversion date and its impact on equity.

Verification of Compliance of Corporate Governance :


To implement corporate governance SEBI has directed stock exchanges to insert a new clause in their Listing Agreement, under which specified Listed companies and those seeking listing will implement corporate governance.
The company auditor has to certify compliance with the conditions of corporate governance applying the requirements of Auditing and Assurance standards and the code of conduct. The auditor has to certify that the management has complied with the conditions of corporate governance under clause 49 of the Listing Agreement. He has to verify that the following conditions have complied :

1) Board of Directors :
The Board of directors should have to least 50% non-executive directors. It should also have independent directors whose number will depend on whether the chairperson is executive or non-executive. If the Chairperson is non-executive minimum one third of the Board will consist of independent directors. The number of independent directors will be at least 50% of the Board members if the Chairperson is an executive director.
An independent director is one who receives director's remuneration but does not have any other material pecuniary relationship or transactions with the company or its promoters, management or subsidiaries which might affect independence of the director. In case of non-executive directors, there will be disclosure in the Annual Report about their entire pecuniary relationship or transactions with the company.

2) Audit Committee :
It is necessary for a listed company to form an audit committee. The committee should have at least three members. The members should all be non-executive directors and majority of them should be independent directors. The committee should review the financial statements and ensure fair financial reporting. It should act as a watch dog, enforcing discipline and control of reduce opportunities for fraud.

3) Remuneration of Directors :
Board of directors will take decision on remuneration of non-executive directors The auditor should see that the company has made the following disclosures in the section on Corporate Governance' in the annual report:
  • All elements of remuneration package of all directors i.e. salary benefits, bonus stock options, pension, etc.
  • Details of fixed component and performance linked incentives together with performance criteria.
  • Service contracts, notice period, severance fees.
  • Any stock option details, whether the issue of securities is at a discount and the period over which it would accrue and be exercisable.

4) Board Procedures :
Board meetings should take place at least four times in a year. The maximum interval between any two meeting should not be more than four months. There is provision to make available maximum information to the Board at each meeting.

5) Management :
The company should see that a Management Discussion and analysis report should form a part of annual report to shareholders whether as part of the Director's Report or as an addition to it. The management Discussion and analysis report should contain discussion on the following matters :
  • Industry structure and developments
  • Opportunities and threats
  • Segment-wise and product-wise performance
  • Outlook
  • Risks and concerns
  • Internal control systems and their adequacy
  • Financial performance as regards operational performance
  • Material developments of Human Resources / Industrial Relations front including number of people employed.
The management must make disclosure to the Board of all material financial and commercial transactions in which they have personal interest which may have potential conflict with the interest of the company. Such transactions may include dealing in company shares, commercial dealings with bodies where management and their relatives have shareholding.

6) Shareholders :
If there is appointment of a new director or reappointment of an existing director, the company should disclose to the shareholders the following information :
  • Brief resume of director
  • Nature of his expertise in specific functional areas
  • Names of companies, in which appointed / reappointed director holds directorship and / or membership of Committees of Board.
The company should insert on its website information on quarterly results, or presentations made it to analysis. Alternatively, it should send such information in proper form to the stock exchange where it stands listed.
The company should form a Board Committee under Chairperson-ship of a non-executive director to resolve complaints of shareholders and investors regarding transfer of shares, non-receipt of balance sheet, declared dividend, etc. To spend up share transfer, the company should delegate share-transfer power to any officer, committee, registrar or share transfer agent. The person or agency delegated with such power should meet at least once in a fortnight to address shares transfer formalities.

7) Report on Corporate Governance :
The company has to ensure that in its annual report there is a separate section on corporate governance with a detailed compliance or action taken report. There should be specific reference, with explanation, to any non-compliance with any mandatory requirement laid down in the listing agreement. In the same way it should specify the reason for adoption of non-mandatory requirements.

Certificate by Auditor :
After verifying the compliance of all the above mentioned provisions of corporate governance, the statutory auditor issues a certificate. The company encloses this certificate with the Directors' Report and sends it to all share holders. The company also sends the certificate to stock exchanges together with annual returns filed by it.