Corporate Governance
Corporate Governance
Corporate Governance
GOVERNANCE
2015-2016
Lecture 12 &13
WHAT IS
CG?
CONCEPTUAL BASIS
Characteristics
Origin: Agency
Theory
A theory concerning
the relationship
between a principal
(shareholder) and an
agent of the principal
(company's
managers)
Concept
originated with
separation of
ownership &
management
Agency costs
inherent in
separation of
ownership and
control
Professional
managers have
enormous powers
Governance :
1. What control do
the owners have on
the management ?
2. How do you
ensure that the
powers are not
misused?
FUNDAMENTAL
PRINCIPLES OF CG
OBJECTIVE OF CG
TYPE OF DIRECTORS
Executive directors
Have day-to-day
management
responsibilities
Non Executive
Directors/ Independent
Directors
take no part in the
day-to-day running of
the business, but
have the same
responsibilities as
executive directors
They use their
experience and
expertise to provide
independent advice
and objectivity, and
they usually have a
role in monitoring
executive
management
Nominee directors
The interests of
substantial
shareholders or the
companys bankers
may be represented
by a nominee director
WHO IS AN INDEPENDENT
DIRECTORS? : CLAUSE 49
REQUIREMENTS (CONTD)
is not a partner or an executive of the statutory
audit firm or the internal audit firm that is
associated with the company,
has not been a partner or an executive of any such
firm for the last three years. This will also apply to
legal firm(s) and consulting firm(s) that have a
material association with the entity.
is not a supplier, service provider or customer of the company.
This should include lessor-lessee type relationships
is not a substantial shareholder of the company, i.e.
owning two percent or more of the block of voting
shares
Institutional directors on the boards of companies shall be
considered as independent directors whether the institution is
an investing institution or a lending institution.
DUTIES OF DIRECTOR
CHAPTER XI (SECTION 166)
Subject to the provisions of this Act, a director of a company shall
act in accordance with the articles of the company.
A director of a company shall exercise his duties with due and reasonable
care, skill and diligence and shall exercise independent judgment.
# skill
# diligence
ROLE OF BOARD OF
DIRECTORS
The law imposes three clear duties on board
members, the duties of care, good faith, and loyalty.
ROLE OF BOARD OF
DIRECTORS
The duty of good faith is one of obedience, which
requires board members to be faithful to the
organizations mission.
In other words, they are not permitted to act in a
way that is inconsistent with the central goals of the
organization.
Their decisions must always be in line with
organizational purposes and direction, strive
towards corporate objectives, and avoid taking the
organization in any other direction.
ROLE OF BOARD OF
DIRECTORS
The duty of loyalty requires faithfulnessa board
member must give undivided allegiance when
making decisions affecting the organization.
This means that conflicts of interest are always to
be resolved in favor of the corporation.
A board member may never use information
obtained through because of the position as a
board member for personal gain, but instead must
act in the best interests of the organization.
ROLE OF INDEPENDENT
DIRECTOR
Shareholders
Shareholders especially minority shareholders look at
independent directors providing transparency in respect of the
disclosures in the working of the company and balance in
resolving conflict areas.
Other Stakeholders
Evaluating the boards or management decisions in respect of
employees, creditors etc. and in protecting stakeholders
interest.
20
21
Yes
83
89
81
No
17
11
Latin America
Asia
0%
19
Europe/US
PURPOSE OF SECTION
135 & CSR RULES
The general purpose of the CSR legal provision is
to encourage mindful, catalytic participation of
corporate India in the countrys development
centric agenda
(As per Section 134(3)(o) also the details about the policy
developed and implemented by the company on CSR
initiatives taken during the year
SECTION 135(4)
The Board shall
(a) after taking into account the recommendations made by
the CSR Committee, approve the CSR Policy for the
company and disclose contents of such Policy in its report
and also place it on the company's website, if any, in such
manner as may be prescribed; and
SECTION 135(5)
The Board of every company shall ensure that the
company spends, in every financial year, at least 2
per cent of the average net profits of the company
made during the 3 immediately preceding financial
years, in pursuance of its CSR Policy:
Provided that the company shall give preference to
the local area and areas around it where it
operates, for spending the amount earmarked for
CSR activities:
Provided further that if the company fails to spend
such amount, the Board shall, in its report made
under clause (o) of sub-section (3) of section 134,
specify the reasons for not spending the amount.
The
The company
company would
would formulate
formulate aa CSR
CSR Policy
Policy based
based on
on its
its response
response strategy
strategy
ItIt will
will have
have to
to initiate
initiate activities/projects
activities/projects through
through measurable
measurable budgets
budgets and
and timelines
timelines leading
leading
to
to impactful
impactful sustainable
sustainable development.
development.
An
An alert
alert CSR
CSR Committee
Committee of
of the
the Board
Board of
of Company
Company must
must closely
closely monitor
monitor its
its CSR
CSR Policy
Policy to
to
ensure
ensure that
that itit is
is effective.
effective.
The
The Policy
Policy may
may be
be periodically
periodically reviewed
reviewed to
to be
be in
in harmony
harmony with
with changing
changing societal
societal and
and
environmental
environmental needs.
needs.
Setup
Setup the
the CSR
CSR
Committee
Committee of
of the
the
Board;
Board; decide
decide on
on
its
its composition
composition
based
based on
on
responsibilities
responsibilities and
and
operational
operational
involvement
involvement
IfIf Independent
Independent
Director
Director is
is required
required
the
the same
same should
should be
be
appointed
appointed
Pass
Pass aa resolution
resolution in
in
the
the Board
Board
approving
approving the
the
composition
composition of
of the
the
CSR
CSR Committee
Committee
In
In case
case of
of
Companies
Companies that
that are
are
part
part of
of larger
larger
corporate
corporate groups
groups //
conglomerates,
conglomerates,
they
they may
may also
also need
need
to
to look
look at
at
composition
composition of
of
individual
individual company
company
CSR
CSR Committees
Committees
in
in the
the context
context of
of
larger
larger group
group effort
effort
on
on CSR
CSR and
and overall
overall
co-ordination
co-ordination
The tenure and functioning of the CSR Committee shall depend upon the
extant governance rules of the Company as defined by its Board
CSR COMMITTEE:
RESPONSIBILITIES
1. Formulate CSR Policy and identify activities to be undertaken
(preference to be given to local areas around its operations) as
specified in Schedule VII of the Companies Act 2013. This
should be done in a consultative manner, after due
deliberations with the CSR team, local officials of the company
and beneficiary communities
2. The detailed list of activities with allocated expenditure in the
format given in the Act should be appended to the Policy
3. Report back to the Board of Directors for approval of the CSR
Policy
4. Regularly monitor the implementation of the CSR Policy
5. Change/modify the CSR Policy as per feedback from the
implementation of the existing Policy. CSR activities with
allocated budget and monitoring mechanism can/will also be
revised accordingly. Any change in Policy must be duly ratified
by the Board