BEHAVIOURAL ASPECTS OF CORPORATE GOVERNANCE CS Mahesh A. Athavale KANJ & Associates Partner 25 TH March 2012 ONE DAY NATIONAL CONFERENCE BY INDSEARCH www. kanjcs. com 3/16/2018
CORPORATE GOVERNANCE u Blend of law, regulation and appropriate voluntary practices. u To attract financial and human capital to perform efficiently u To generate long term economic value for the stakeholders in the interest of the society as a whole. www. kanjcs. com 3/16/2018
ICSI’s DEFINITION Set of systems, processes and principles to ensure that the company is governed in the best interest of all stakeholders Realization of long term goals of promoters, but at the same time consideration for all stakeholders adhering to business ethics to ensure enhancement of value of employees, stakeholders and company as a whole. www. kanjcs. com 3/16/2018
What constitutes good Corporate Governance? Adoption and adherence of best corporate practices Accountability of the top management to the stakeholders Complete transparency in the management of the corporate body, Disclosure of all relevant information to shareholders etc www. kanjcs. com 3/16/2018
Have we forgotten our own values? What's on our mind, is reflected in our speech. Our acts depend upon our speech. Mind, Speech and Acts are balanced in case of wise men. www. kanjcs. com 3/16/2018
INDEPENDENT DIRECTORS PLAY CRITICAL ROLE IN CG WHO ARE THEY & WHY HAVE THEM? ØVarious committees have studied the role of nonexecutive independent directors and have explained the kind of independence required. ØTo bring an independent judgment on issues of strategy, performance and resources, including key appointments and standards of conduct. www. kanjcs. com 3/16/2018
ØTo bring objectivity in making decisions that determine the survival and prosperity of the organization. ØTo ensure well-being of the stakeholders i. e. shareholders, workers , suppliers, customers , society at large and the company itself. ØTo help company to outperform competitors and dominate. www. kanjcs. com 3/16/2018
Can a person who does not have stake in the company take decisions in the interest of the company? An ID can do so, perhaps YES, because he is……… ØSelf Governed , autonomous and free from obligations & influence. ØNot affiliated , aligned or integrated with PDs ØNot prejudiced or conditioned ØNot looking to others for opinion or guidance of one's conduct. ØNot biased by others. ØNot bound by or committed to one of the parties. www. kanjcs. com 3/16/2018
Possible reasons for mandatory provision that at least 50% of the Board should be Independent Directors. ØNeed for multidisciplinary inputs ØNumerous shareholders with geographical stretch ØHolistic approach in decision making ØAdvantage of talent and high performers ØIndependent performance analysis ØControl and coordination in the organization ØDiscipline of process and clarity in values ØWide latitude for innovation ØAbility to see the big picture while knowing when to drill down on specifics www. kanjcs. com 3/16/2018
Related Issues Role of IDs has come under intense scrutiny in the wake of various collapses- the notorious Enron , Worldcom, Xerox debacle and many more. In India SATYAM has provoked the discussions. www. kanjcs. com 3/16/2018
Directors’ Role “The directors are not servants to obey directions given by the shareholders as individuals; they are not agents appointed by and bound to serve the shareholders as their principals. They are persons who may by the regulations be entrusted with the control of the business, and if so entrusted they can be dispossessed from that control only by statutory majority which make the articles. ” – Lord Justice Buckley (1908) www. kanjcs. com 3/16/2018
IDs’ Contribution Functions of the Board are two-fold; 1. To lead company into the future by determining strategy, finalizing vision and policies. 2. Monitoring and controlling its performance in the present. IDs should contribute in both areas. To choose IDs just to monitor on behalf of the shareholders is a waste of an opportunity to use their talents and experience and can be a divisive factor, polarizing the board into “executive” and “nonexecutive” groups. It is not healthy. www. kanjcs. com 3/16/2018
IDs contribute significantly in AUDIT REMUNERATION AND NOMINATION COMMITTEES www. kanjcs. com 3/16/2018
Qualities of Independent Director ØIntegrity. ØBusiness acumen. ØAdequately trained. ØWillingness to actively participate ØUnafraid of performance reviews. ØUpdated about happenings around. ØCommanding position in his peer group ØCourage and ability to act and say “ NO”. www. kanjcs. com 3/16/2018
ØCapable of assessing the company’s problem and identify opportunities. ØShould have clarity, decisiveness and confidence. ØBe Devoid of any vested interest. ØShould have sufficient financial sources so that the sittings fees do not become substantial percentage of the ID’s income. ØTrustworthy. ØLaw abiding by nature www. kanjcs. com 3/16/2018
ØA director cannot be treated as an independent director if he has any material pecuniary relationships or transactions with: (a) the company; (b) its promoters; (c) its senior management; (d) its holding company; (e) its subsidiaries; or (f) its associated companies. www. kanjcs. com 3/16/2018
Promoters Vs Independent Directors Some possible situations : Preferential allotment of securities to Promoter group. Granting advances/ loans to the relatives of Partners. Entering into Immovable property related transactions – These are claimed to have been kept outside the scope of section 297. - DCA’s view. www. kanjcs. com 3/16/2018
Promoters Vs Independent Directors…. . Contd ØNeed to borrow fund , its utilization and management. ØTaking Car/ property of PD / his relative on rent by the company and giving it back to the same person as a perquisite. - Tax Planning? ØIs it Fair ? www. kanjcs. com 3/16/2018
Promoters Vs Independent Directors…. . Contd ØCreating Public Charitable Trusts, where relatives of Directors are Trustees and giving huge donations to such trusts. At times even beneficiary is a selected person. ØTransaction of Purchase / sale of goods – services with a private company in which relative of Director is interested. Perhaps Legal but unfair. www. kanjcs. com 3/16/2018
Promoters Vs Independent Directors…. . Contd ØObtaining 297 approval by keeping on record ‘created’ tenders. ØBuy back of shares to increase promoter group stake in the company. ØAppointment of relative ( wife's brother ) on a disproportionate salary. Perhaps legal – but unfair. www. kanjcs. com 3/16/2018
Instances of Conflict ØMr. D an ID raises an objection in the meeting on the growing expenses on staff welfare. He wants to make his presence felt in the meeting. After the meeting he wants the company to book Air ticket , a car and five star accommodation for his personal tour. Case of double standards? www. kanjcs. com 3/16/2018
Instances of Conflict…. Contd ØMr. Q, a Director wants that company should purchase cement from X & co where Mrs. Q is 90% Partner. CS of the company draws attention to section 297. The Board asks Mr. Q to resign as Director. Contract is entered into for supply of cement for next 10 years. Later on after 10 days of execution of the contract Mr. Q re-enters the board as an Additional Director. Legal but unfair( ? ) www. kanjcs. com 3/16/2018
Instances of Conflict…. Contd ØX ltd a pharmaceutical company is selling a medicine which is very effective on certain decease. ØBut that medicine has few serious side effects. ØCompany has been selling the medicine since last ten years and turnover is Rs. 100 Million p. a. ØHowever for all these years there has been outcry from certain sections of society about serious side effects and that medicine being hazardous. ØX Ltd never bothered for these allegations. www. kanjcs. com 3/16/2018
ØAdmittedly there were certain bad side effects but there was no ban on the medicine. ØRecently, as public outcry increased , Government conducted the laboratory tests, which proved about ill effects of the medicine ØNow company has received secret information that Government will ban the medicine from 1 st April 2011. Stock of Rs. 50 Crores is with the company. ØPDs are insisting for disposal of the stock at what ever price. While one ID suggests for destruction of stock ØWhich is a better option heavy discount or destruction of the stock? www. kanjcs. com 3/16/2018
Instances of Conflict…. Contd ØMr. Y is a trustee of an Educational Institute which has employed Mr. X as per Government rules, as a teacher in a school at a salary of Rs. 3, 500 p. m. for 3 years who is called as “Shikshan Sevak”. Govt. does not give any grant beyond this amount. ØAs per government rules, if Mr X. is confirmed, he will get a salary scale of Rs 12, 000 per month and that increased salary would be reimbursed by Govt. by way of a grant. www. kanjcs. com 3/16/2018
Ø Mr. Z is working as a gardener in the same institute at a salary of Rs. 6000 p. m. as per the Minimum Wages Act for unskilled workers. ØMr. X feels humiliated and has demanded rise in his salary at least above a gardener. ØSome of the trustees think that anything beyond Rs 3, 500/- p. m. should not be paid to Mr. X since it will have to be paid from the own sources of the Trust. How should Mr. Y decide? www. kanjcs. com 3/16/2018
Instances of Conflict…. Contd ØMr. R is Chairman of section 25 Company. ØMr. R is a genuine , honest social worker who has been doing yeoman's work for the blind persons. ØOne fine morning Mr. R receives a proposal for a donation of Rs. 50 crore ( in cash ) from a donor who believes in the integrity of Mr. R and therefore wants to help a noble cause being done by that company but the donor does not want to reveal his identity and the source of his income. ØShould Mr. R accept the donation? www. kanjcs. com 3/16/2018
Instances of Conflict…. Contd ØXYZ Ltd. was incorporated in 2005. Never earned any profits. Return on capital was ZERO. The company does not have accumulated reserves/ surplus. ØXYZ Ltd. for the first time has earned distributable profits. ØPromoters intend to transfer 10 percent to the reserves, as is statutorily required and distribute rest of it by way of dividend. ØOne of the IDs believes that it is more prudent to transfer 50 percent to reserves and declare less % of dividend. www. kanjcs. com 3/16/2018
What Arya Shri Chanakya has told us? www. kanjcs. com 3/16/2018
THANK YOU www. kanjcs. com 3/16/2018
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