3. Background of Corporate
Governance
Ideal corporate governance is characterized
by a firm commitment to ethical practices by
the entire organisation in all of its dealings with
a wide group of stakeholders encompassing
employees, customers, vendors, regulators
and all shareholders
Corporate governance rests on four pillars
Transparency
Full disclosure
Independent Monitoring
Fairness to all stakeholders
4. Independent Directors –
Evolution
Independent Directors is a concept
which has been in existence for a few
decades now
Gained prominence in 1993 when the
Cadbury Report was published by the
committee set up by the London
Stock Exchange
5. Independent Directors – Evolution
– Cadbury Report (1993)
Cadbury Report‟s recommendations:
Majority of non-executive directors
should be independent of
management
Specified terms for non-exec
directors
Executive remuneration should be
subject to a remuneration
committee
Audit committee with 3 non-
6. Independent Directors – Evolution
– Greenbury Report (1995)
Greenbury Report then followed this
in 1995 and it addressed the growing
concern of Director Remuneration
It was suggested that the role of
Independent Directors be enhanced
to tackle the issues relating to
Executive Remuneration
7. Independent Directors – Evolution
– Higgs Review (2003)
Headed by Sir Alan Higgs in England,
Higgs advocated more stringent
criteria for board composition and
evaluation of Independent Directors
Proper balance of skills and experience
of both executive and non executive
directors
Independent directors should meet
once a year without chairman or
executive directors present
8. Independent Directors – Evolution
– Kumarmangalam Birla
Report(1999)
SEBI had constituted a Committee on
May 7, 1999 under the chairmanship of
Shri Kumarmangalam Birla, then
Member of the SEBI Board “to promote
and raise the standards of corporate
governance”. Based on the
recommendations of this Committee, a
new clause 49 was incorporated in the
Stock Exchange Listing Agreements
(“Listing Agreements”).
9. Independent Directors – Evolution
– Narayana Murthy Report(2003)
The Committee was constituted by SEBI
under the Chairmanship of Narayana
Murthy
The committee was constituted to review
the performance of Corporate
Governance in India country as well as
to determine the role of companies in
responding to rumour and other price
sensitive information
This was with the objective to enhance
transparency
10. Independent Directors – Evolution
– Narayana Murthy Report(2003)
Some important recommendations of
the committee include:
Giving greater importance to the Audit
Committee and the non-executive directors
on the board
All audit committee members should be
“financially literate” and at least one
member should have accounting or related
financial management expertise
11. Role of an Independent Director
Independent directors bring in an outside
perspective while evaluating the board and
management decisions thus creating a
balance in the interest of the shareholders
Including executive remuneration,
succession planning, changes in corporate
control, takeovers and acquisitions and the
audit
Today independent directors are a core
resource in delivering the good governance
processes that shareholders expect.
12. Role of an Independent Director
Independent directors primarily
provide inputs to all key decisions
such as strategies, performance
evaluation and risk evaluation
affecting the company
Independent Directors are also part
of Committees and are often
Chairmen of Committees, thereby
empowering their judgements and
decisions
13. Responsibilities of an Independent
Director
Thorough preparation for the meeting
Free and frank expression of
opinions.
Being the conscience of the Board
Up-to-date information on laws and
regulations governing the company
Last but not the least, responsibility to
act in the larger interest of true
growth and development of the
company
14. What Clause 49 of the Listing
Agreement says
Not less than 50% of the board
should comprise of non-executive
directors
Executive or non-executive director
as chairman:Chairman of the board
Non-Executive Executive
Atleast 1/3rd of the board
should have independent
directors
Atleast 1/2 of the board
should have independent
directors
15. What the New Companies Act
says
Every listed company will have atleast one-
third of total number of directors as
independent directors, with any fraction to be
rounded off as one – Sec 149(4)
Nothing regarding 50% of independent
directors if Executive Director is chairman
Now the Central Government has the power to
prescribe minimum number of independent
directors in other class of public companies
16. Definition of Independent
Director
The New Companies Act also defines the term
„Independent Director‟. Some significant additional
criteria as per the new act are:
Should be a person of integrity and possess relevant
expertise and experience
Should not have pecuniary relationship/transactions
with the company, its promoters, its directors. This
should not have existed in the current FY or preceding
2 FYs.
Central Government may prescribe additional
qualifications for appointment of independent director
Nominee Director is not considered an Independent
Director
18. Independent Directors -
Appointment
The Independent Directors appointed should give
a declaration of independence annexed to the
Financial Statement laid before a company in a
General Meeting –149(6)
Term of Independent Directors is now 5 years and
can be reappointed for another term of 5 years,
but no more than 2 consecutive terms – Sec
149(10)
Eligible for reappointment after 3 years of expiry
of last term – Sec 149(11)
Retirement provisions not applicable to
Independent Directors
19. Independent Directors -
Selection
A company notified by the Central Government
will maintain a database containing the names,
addresses and qualifications of the persons
eligible and willing to act as Independent
Directors – Sec 150
20. Independent Directors -
Remuneration
An independent director will NOT be entitled to
any stock option(ESOP) and may receive
remuneration by way of fee
reimbursement of expenses for participation in
the Board and other meetings and profit
related commission as may be approved by
the members
21. Role in Committees and
Evaluation
The Audit Committee should consist of a minimum
of three directors with independent directors
forming a majority
Nomination and Remuneration Committee
consisting of three or more non-executive
directors out of which not less than one-half
should be independent directors
Annual evaluation of all directors should be
undertaken by the Board to evaluate its
performance
Independent Directors will evaluate the
performance of other directors in their roles
22. Liability
Shall be liabile only in respect of such acts of
omission and commission by the company
which had occurred with his knowledge,
attributable through Board processes and with
his consent on connivance or where he had
not acted diligently
24. Directors - Appointment and
Qualification
Chapter XI, and XII cover Directors & Meetings;
Chapter XIII covers Managerial Personnel
All cos. minimum one director who stayed in India
for at least 182 days in the previous calendar
year – Sec 149(3)
Prescribed class of companies - at least one
woman director on the board – Sec 149(1)
Any public company with Share capital > Rs.5
crores or 1000 or more shareholders; may have a
director elected by small shareholders. Did not
exist before – Sec 151Prescribed class of companies:
i) All listed companies – 1 year transition time
ii) Other public cos paid up capital > Rs.100
crores; or turnover > Rs.300 crores – 3 years
25. Directors - Appointment and
Qualification
Public co. or subsidiary of public co. can now
have upto 15 directors on the board. Previously it
was 12. An extension beyond this will require a
special resolution at the general meeting
Directors can now hold Directorships in upto 20
cos.; increased from the cap of 15 cos. However,
not more than 10 public cos (including
subsidary/holding of a public co.)
Every person appointed as a Director should
furnish his DIN and a declaration that he is not
disqualified from acting as a Director – Sec 152(4)
26. Directors - Appointment and
Qualification
Not less than 2/3rd of total number of directors
shall be persons whose office is liable to
determination by either rotation or retirement;
and appointed in a general meeting
The BoD may appoint a person to act as an
alternate director for a director who is absent
from India for not less than 3 months. He will
vacate the position after the director returns
27. Directors – Resignation and
Removal
Resignation: A director may resign from his office
by giving notice, in writing, to the company. BoD
and Co. shall intimate the same to the registrar –
Sec 168
A Director should also communicate his reason for
resignation to the registrar in 30 days – Sec 168
A company may, by ordinary resolution, remove a
director before the expiry of term; after giving him
a reasonable opportunity of being heard
A special notice will be required of any resolution,
to remove a director or to appoint somebody in
place of a director so removed
28. Directors – Disqualification – Sec
164
Not eligible for appointment if:
he is of unsound mind and stands so declared by a competent
court;
he is an undischarged insolvent;
he has applied to be adjudicated as an insolvent and his
application is pending;
he has been convicted by a court of any offence
an order disqualifying him for appointment as a director has been
passed by a court or Tribunal and the order is in force;
he has not paid any calls in respect of any shares of the
company held by him
he has been convicted of the offence dealing with related party
transactions under section 188 at any time during the last
preceding five years; or
he has not been allotted the Director Identification Number
29. Can the Companies Act prescribe
the duties of Directors? – Sec 166
A director will :
Act in accordance with the articles of the
company
Act in good faith to promote the objects of the
company
Exercise duty with care, skill and diligence
Not enter into situations with conflict of interest
Not achieve or attempt to achieve undue gain
or advantage for him or
relatives/partners/associates
Not assign his office
31. Meetings of the Board
First Board meeting in 30 days from Incorp – Sec
173(1)
Minimum 4 Board meetings every year
Not more than 120 days gap between 2 Board
Meetings
A notice of not less than 7 days to call a Board
meeting(either by hand/electronic means) – Sec
173(3)
Listed Companies and prescribed companies shall
form Audit Committee
Listed Companies and prescribed companies shall
constitute a Nomination and Remuneration Committee
Shareholders Relationship Committee for every
32. Meetings of the Board
Quorum shall be 1/3rd of total strength or 2
directors, whichever is higher – Sec 174
33. Other Sections
Political contribution limit has been raised from
5% to 7.5% of average net profits for the
preceding 3 financial years
Defects in appointment of directors will not
invalidate the actions taken by him as a
director
Restrictions on loans to Directors – Now
applicable to both Private and Public
Companies (Unless company gives loans in
ordinary course or business and is as per rate
declared by the RBI)
35. Managerial Personnel
Maximum limit of 11% of net profits
Where inadequate profits – remuneration shall be as
per schedule V as follows – Higher of (A) or (B)
(A)
(B) 2.5% of current relevant profit
However, above limits can be doubled if a special
resolution is passed
Where effective capital is Remuneration limit
Negative or <5 crores 30 lakhs
5 crores but <100 crores 42 lakhs
100 crores but <250 crores 60 lakhs
>250 crores 60 lakhs plus 0.01% of the effective
capital beyond 250 crores
36. Managerial Personnel
Independent directors do not get stock options
but may get payment of fee and profit linked
commission, as may be prescribed – Sec
197(7)
Every company(of the prescribed class) shall
have a Managing Director, CEO or Manager;
and in their absence a Whole Time Director
and a Company Secretary – Section 203