Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance mainly involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community at large.
The soul and core of corporate governance is not the conduct or behavior that we see on the face of it. It is internalized values that an organization or a company and its top-level management follow. The essence of a human being is consciousness and the world we create around us is the expression of our consciousness. The creative and the beautiful, as well as the corrupt and degenerate, are the outcome of the consciousness of human beings.
The great thoughts and deeds of Mahatma Gandhi or Mother Teresa are the result of their consciousness. Similarly, the scams of WorldCom and Satyam are also the result of corresponding consciousness. The quality of our own consciousness is not determined by the intelligence quotient or our intellect.
Corporate governance is concerned with the process by which corporate companies and particularly limited liability companies are governed. Business people, as well as the general public, expect good business ethics and effective corporate governance from the business leaders.
In the modern era of globalization, corporate governance plays an important role. It ensures that corporate managers run their businesses successfully and take care of the long-term interests of the stakeholders of the company. Corporate governance improves capital efficiency of companies and provides a roadmap for an entity, helping the leaders of a company in making decisions by law, benefits to stakeholders, etc.
Corporate governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management of the company and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders of the company. Corporate governance rests with the vision and perception of the leadership and a leader need to adopt a vision for corporate governance.
Today’s business faces a multitude of challenges, increasing business pressure on all the fronts, globalization, shorter product life cycles, cybersecurity, overcapacity, complex rules and regulations by the government, currency volatility, and value migration etc.
These challenges will bring about economic discontinuities that are unprecedented in scale and scope and would require highly innovative approaches. We have to leapfrog over existing technologies rather than incrementally improve them. Innovation will bring tremendous resistance from vested interest. This is the board’s priority in today’s economy which is driven by innovation.
By following good corporate governance practices corporate earns or achieves the best reputation in the world
World over, several committees and task forces have strongly advocated for corporate governance viz. Kumar Mandalay Birla Committee, Narayan Murthy Committee, Cadbury Committee etc. Some of the corporate governance practices would include independent oversight of management and accounts of the company, fair and equitable treatment for all the shareholders of the company, fair voting processes conducted by the company, prohibition of insider trading and abusive self-dealing, open and efficient markets, timely and effective disclosure of financial and operating results to the stakeholders of the company, foreseeable risk factors and matters related to corporate governance and regulation and legal recourse if principles of fair dealing are violated.
The management must have the freedom to drive the company forward. The board of directors of the company is accountable to shareholders of the company and the management is accountable to the board of directors. The empowerment, combined with accountability provides an impetus to performance and improves effectiveness, thereby enhancing shareholder’s value leading to excellence.
Role of Company Secretary in Good Corporate Governance
Company Secretaries all over the world have been assigned the responsibility for good corporate governance practices to be followed by the companies where they work or for their clients by the Institute of Company Secretaries of India.
Under the erstwhile SEBI listing regulations under clause 49, there were provisions for corporate governance. Under new SEBI Listing Obligations and Disclosure Requirements (LODR) there are provisions under regulation 15 to 27 there are provisions for good corporate governance.
The composition of the Board of Directors
Regulation 17 of the listing regulations states that the board of a listed entity shall have an optimum combination of executive and non-executive directors with at least one woman director and 50% of the board shall comprise of non-executive directors. In case the chairperson of the board of directors is a non-executive director.
1/3rd of the board shall comprise of independent directors and where the chairperson is an executive director, ½ of the board shall comprise of independent directors. In case the non-executive chairperson is a promoter or related to the promoter or any other person occupying management position in the board of directors or at one level below the board of directors, at least ½ of the board of directors shall comprise of independent directors.
The Companies Act, 2013, however, specifies that companies which are listed shall have at least 1/3rd of its board of directors as independent directors without making a distinction between the requirements for appointment of the number of independent directors when a chairperson of the board of directors is an executive or a non-executive director. However, the Companies (Appointment and Qualification of Directors), Rules 2014 specifies that public companies having a paid up capital of Rs. 10 crores or turnover of Rs. 100 crores or outstanding loans, debentures and deposits exceeding Rs. 50 crores as at the last date of the latest audited financial statements shall have at least 2 independent directors.
Here the role of the Company Secretary is to oversee whether the composition of the board is in conformity as per the provisions of the Companies Act as well as listing regulations.
A Company Secretary has to ensure that the board of directors of the company must consist of at least one women director. This provision has encouraged the women power and importance in today’s world.
Code of Conduct for the Board of Directors
The listing regulations specify that the board of directors shall draw up a code of conduct for all the members of the board and the senior management personnel of the listed entity.
The regulations further stipulate that the code shall incorporate the duties of the independent directors as laid down in the Companies Act, 2013. The regulations also require that the members of the board shall confirm compliance with the code in the first meeting of the board held in every financial year.
The annual report of the company shall also contain a confirmation to this effect by the directors duly certified by the chief executive officer. Here the role of a Company Secretary is to ensure that he/ she develops the code of conduct for the board of directors in consultation with the top management of the Company.
Also, a Company Secretary has to ensure that the same information is disclosed in the annual report of the company as well it shall be placed on the website of the company.
Formation of Committees
Each and every listed entity shall ensure that the company has composed the below-mentioned committees:
Nomination and remuneration committee
Risk management committee
Stakeholders grievances committee
Role of Company Secretary is to ensure compliance by forming all the above-mentioned committees. Along with the proper combination of executive and independent directors.
Company Secretary shall act as a secretary of all the above-mentioned committees.
Company Secretary shall ensure that the company shall have a policy on the preservation of documents and shall divide the same in two parts whose preservation is permanent and which needs to be preserved for not less than 8 years.
Company Secretary or the registrar and share transfer agent shall be responsible for grievance redressal of shareholders complaints and resolve the same registered on scores platform or with NSE or BSE.
Company Secretary is responsible for the appointment of independent directors in such a way that the directors fulfill the criteria laid down in companies act and listing regulations.
Company Secretary is not only responsible for compliance of companies Act and listing regulations but he/she is also responsible for compliance of various other laws like Provident Fund Laws, Civil Laws, and Intellectual Property Laws etc.
A Company Secretary shall ensure that the company holds at least one (1) meeting of the board of directors in each quarter but the gap between two (2) meetings shall not exceed more than 120 days. He/ she has also to ensure that the quorum requirements have been meeting during the board meeting.
Some of the directors may attend the board meeting through video conferencing, the facility of which shall be provided by the company.
Company Secretary has to ensure that the proper facility for video conferencing has to be provided by the company and proper data shall be maintained after the conclusion of the meeting.
The board of directors of the company can be paid sitting fees of Rs. One lakh per board meeting. Also, the commission can be paid to the board of directors for attending the meeting of the board as approved by the board or shareholders of the company.
Regulation 19 of the Listing Regulations, discuss the provisions with regard to the audit committee. The regulations stipulate that the committee shall have a minimum of three (3) directors as its members and 2/3rd of the members shall be independent directors.
Section 177 of the Companies Act, 2013, however, stipulates that a listed entity shall have an audit committee which shall consist of a minimum of three directors with the independent directors being the majority. While the Companies Act stipulates that the majority of the audit committee including the chairperson shall be persons with the ability to read and understand financial statements. The listing regulations state that all the members of the committee shall be financially literate and at least one member shall have accounting or related financial management expertise. Financially literate has been defined to mean the ability to read and understand basic financial statements and having accounting or related financial management expertise is defined to mean having requisite professional certification in accounting or any other comparable experience or background which results in the individual’s financial sophistication including being a CEO or CFO or such other senior officer with financial oversight responsibilities.
Further, the listing regulations have also mandated a quorum for the audit committee meetings, which shall be either two members or 1/3rd of the members of the committee, whichever is greater with at least 2 independent directors. In other words, if the audit committee has 3 members of which 2 are independent, both the independent directors should be present to constitute a quorum for an audit committee meeting. The Companies Act, 2013, however, does not contain such a stipulation.
Nomination and Remuneration Committee
Both the listing regulations and the Companies Act, 2013 contain identical provisions with regard to the composition of the nomination and remuneration committee. There is a slight difference in the role of the nomination and remuneration committee as enumerated in the listing regulations as compared to the policy as stipulated under the Companies Act, 2013 as the regulations specify that the committee shall devise a policy on the diversity of the board of directors.
Another important difference between the two is that the regulations stipulate the presence of the chairperson of the committee being present at the annual general meeting of the company to answer shareholder queries. The Companies Act stipulates that the policy shall be included in the board report, while no such requirement has been made in the listing regulations.
Stakeholders Relationship Committee
As per the Listing Regulations, all listed entities must have a Stakeholders Relationship Committee to specifically look into the mechanism of redressal of grievances of shareholders, debenture holders and other security holders, the Companies Act, 2013 specifies that a stakeholders relationship committee shall be constituted if a company consists of more than 1000 shareholders, debentures, deposit holders and any other security holders at any time during a financial year. The stipulation with regard to a minimum number is absent in the regulations and further deposit holders are not considered by the regulations.
Risk Management Committee
The Listing Regulations states that the board of directors shall constitute a Risk Management Committee for the top 100 listed entities determined on the basis of market capitalization as at the end of the immediate previous financial year. On the other hand Section 134(3) of the Companies Act, 2013 states that all the companies must have a risk management policy, which shall be responsible for identification of risks which in the opinion of the board may threaten the existence of the company.
Related Party Transactions
The Companies Act, 2013 stipulates that a company shall enter into a contract or an arrangement with a related party with respect to sale, purchase or supply of any goods or materials, selling or otherwise disposing of or buying property of any kind, leasing of property of any kind, availing or rendering of any services, appointment of any agent for purchase or sale of goods, materials, services or property, appointment of a related party to any office or place of profit in the company, its subsidiary or associate company and underwriting the subscription of any securities or derivatives thereof of the company shall be entered only with the consent of the board of directors given by way of a resolution at a meeting of the board of directors.
Rule 6(a) of the Companies (Meetings of Board and its Powers) Rules, 2014 stipulates that all related party transactions shall require the approval of the Audit Committee after the same is approved by the Board of Directors. The regulations, however, state that all the related party transactions shall require the prior approval of the audit committee. Hence, any transaction by the Company, in addition to what is specified under Section 188 of the Companies Act, 2013 with a related party as defined under Section 2(76) of the Companies Act, 2013 shall require prior approval of the audit committee.
Ratification of the same by the audit committee or post facto approval by the audit committee after the transaction has been entered into is not accepted and would be treated as a non-compliance of the regulations. Omnibus approval by the audit committee for related party transactions has been provided in both the regulations and the act.
While the provisions for omnibus approval are the same, the regulations state that where the need for related party transaction cannot be foreseen and the details regarding the same are not available the audit committee may grant omnibus approval for such transactions subject to their value not exceeding Rs. 1 Crore per transaction and the rule has not specified any limit for the value of transaction seeking omnibus approval. Further the regulations state that the approval shall be valid for a period not exceeding one year and fresh approvals shall be taken after the expiry of one year, but rule 6(a) states that the approval shall be valid for one financial year and fresh approval shall be taken after the expiry of the financial year.
The listed entity, as per the listing regulations shall formulate a policy on the materiality of related party transactions and on dealing with the related party transactions. The policy shall also be hosted on the website of the Company. It is the duty of Company Secretary to formulate such policy.
The regulations further state that a transaction shall be considered material if the transaction or transactions to be entered into individually or taken together with the previous transaction during a financial year exceeds 10% of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity. While a blanket limit has been specified by the regulations, the act lays down individual limits for each of the related party transaction specified under Section 188 of the act. Further, while material related party transactions to be entered into by the company would require prior approval of the shareholders in the general meeting by way of an ordinary resolution, the regulations contain a restrictive clause that all the related parties shall not vote on the resolution. The Companies Act, 2013, however, states that only parties to the material related party transaction shall not vote on the resolution. The regulations require the disclosure of all related party transactions in the quarterly Corporate Governance Compliance Report submitted to the stock exchange while such a similar requirement has not been stipulated in the Companies Act, 2013.
All Company Secretaries and Compliance Officers of listed entities, their auditors, Audit Committee and Board of Directors need to have a thorough understanding of the rots. The scrutinizers of the poll and remote e-voting need to be vigilant in providing their report to make complete and adequate compliance of regulation 23 and other applicable regulations of the SEBI (LODR) Regulations, 2015 as well as the provisions of Sections 188 and 189 of the Companies Act, 2013. Further, since so much of data and information are now required to be hosted on the website of the company and policies, etc which is being strictly watched by the regulators, taxation authorities, stakeholders and competitors, all the disclosure and information must be adequate, complete and accurate in all respect.
It is the responsibility of the Company Secretary to conduct the annual general meeting of the Company. Company Secretary not only acts as the KMP of the Company but he acts as the compliance regulator of the Company.
The government has assigned the responsibility of good corporate governance to the Company Secretaries of India.
Today the figures for membership of Company Secretaries have crossed more than 50,000.
Thus the Company Secretaries are not only compliance officers and KMP’s of the company but they are Corporate Professionals of the Company governing the Company’s core area.
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