Module III

Cadbury Report

It was established in May 1991 by The Financial Reporting Council, The London Stock Exchange, and the Accountancy Profession.

The Cadbury Report was oncereferred to as The Report of the Committee on the Financial Aspect Of

Corporate Governance

The report was published in December 1992, following the recommendations of the Cadbury Committee

Itaddresses concerns about The Working of Corporate Governance System. The committee made it its purpose to address the financial aspects of corporate governance and out of this produced a best code of best practice.

REASONS:

ü increasing lack of confidence of investors in the honesty and accountability of listed companies

ü financial collapse of listed corporations

ü auditors mispresentation of facts

ü lack of board accountability

Cadbury was the results of several high profiler companies collapse.it is concerned primarily with protecting weak and widely dispersed shareholders against self-interested directors and managers.

According To Cadbury Report On Corporate Governance Should Be Based On:

    good board practice

    control environment

    transparent disclosure

    well defined shareholders rights

    board commitment

STRENGTHS

    Creating confidence among shareholders, customers……

    improve leadership

    it triggered successive ways of rethinking

CONCLUSION:

Cadbury report was followed by 3 more major reports:

    Green Bury(1995)

    Hamper(1998)

    Turn Bull(1999)

King Report 

INTRODUCTION

The King Report on Corporate Governance is a guideline for the governance structures and operation of companies in South Africa. It is issued by the King Committee on Corporate Governance. Three reports were issued in 1994, 2002 and 2009 going by the name King I, King II, King III successively. A fourth revision was made in 2016 known by King IV. The Institute of Directors in Southern Africa (IoDSA) owns the copyright of the King Report on Corporate Governance and the King Code of Corporate Governance. Companies listed on the Johannesburg Stock Exchange has to adhere to the King Code of Corporate Governance.The King Report on Corporate Governance has been cited as "the most effective summary of

the best international practices in corporate governance".

HISTORY AND APPROACH

      In July 1993 the Institute of Directors in South Africa asked retired Supreme Court of South Africa judge Mervyn E. King to chair a committee on corporate governance. He viewed this as an opportunity to educate the newly democratic South African public on the working of a free economy.

The committee's report was to be the first report of its kind in South Africa.

The king corporate governance code is non-legislative and is based on

principles and practices. It also espouses an apply or explain approach.

The philosophy of the code consists of the three key elements :

● Leadership

Good governance means effective and ethical leadership.Leaders should direct the company to achieve sustainable economic, social and environmental performance.

● Sustainability

It views sustainability as the primary moral and economic

imperative of this century.

● Good Corporate Citizenship.

The code's view on corporate citizenship flows from a company's standing as a juristic person under the South African constitution and should operate in a ssustainable manner.

KING I

In 1994 the first King report on corporate governance (King 1) was

published. It established recommended standards of conduct for boards

and directors of listed companies, banks, and certain state-owned

enterprises. It also involved all stakeholders.

It was applicable to :

● All companies listed on the main board of the Johannesburg Stock Exchange.

● Large public entities as defined by the Public Entities  Act of South Africa.

● Banks, financial and insurance companies as defined by the Financial Services Acts of South Africa.

● Large unlisted companies which included companies with shareholder equity over R50 million.

The key principles from the first King report covered:

● Board of directors makeup and mandate, including the role of non-executive directors and guidance on the categories of people who should make up the non-executive directors.

● Appointments to the board and guidance on the maximum term for executive directors

● Determination and disclosure of executive and non-executive director’s remuneration

● Board meeting frequency

● Balanced annual reporting

● The requirement for effective auditing

● Affirmative action programs

● The company’s code of ethics

KING II

In 2002, the report was revised (King II) including new sections on sustainability, the role of the corporate board, and risk management. This revised code of governance was applicable from March 2002. In addition to those types of organizations listed in King I, it was applicable

to :

● Departments of State or national, provincial or local government administration falling under the Local Government abiding to Municipal Finance Management Act.

● Public institution exercising a power or performing a function in terms of the constitution.

● Public institutions exercising a public power or performing a public function in terms of any legislation, excluding courts or judicial officers.

The key principles from the second King report covered the following areas:

● Directors and their responsibility

● Risk management

● Internal audit

● Integrated sustainability reporting

● Accounting and auditing

 the code is not enforced through legislation. But it co-exists with a number of laws like the Companies Act and JSE Securities Exchange Listings Requirements.

King III

According to King II report , leading companies reported with regard to sustainability separately from other factors. The 2009 King III report, governance, strategy and sustainability were integrated.The companies were recommended to create sustainability reports according to the Global Reporting Initiative's Sustainability Reporting Guidelines. In contrast to the earlier versions, King III is applicable to all entities, public, private and non-profit. The code of governance was applicable from March s2010.

The report incorporated a number of global emerging governance trends:

● Alternative dispute resolution

● Risk-based internal audit

● Shareholder approval of non-executive directors’ remuneration

● Evaluation of board and directors’ performance It also incorporated a number of

new principles to address elements not previously included in the King reports:

● IT governance

● Business Rescue

● Fundamental and affected transactions in terms of director’s ffdresponsibilities during mergers, acquisitions and amalgamations.

King IV

King IV builds on King III . It has been revised to :

● Bring it up to date with international governance codes and best ractice.

● To align it to shifts in the approach to capitalism.

● To take account of specific corporate governance developments in relation to effective governing bodies.

● Increased compliance requirements.

● To align to the new governance structures (e.g. Social and Ethics Committee)

● To align to the emerging risks and opportunities from new technologies and new reporting and disclosure requirements.

Key new or enhanced features of King IV relate to:

● Fair, responsible and transparent organisation wide remuneration.

● Responsible and transparent tax strategy and policy.

● Balanced composition of governing bodies and independence of members of the governing body.

● Delegation to management

● Delegation to committees.

● Corporate governance services to the governing body.

● Performance evaluations of the governing body.

● Audit committee disclosures.

● Risk governance.

● The combined assurance model.

● Social and ethics committees.

● Performance evaluations.

● Responsible institutional investors.

● Technology and information.

King IV was released on 1 November 2016. It is effective for financial

years commencing from 1 April 2017.

Conclusion

Companies have to adhere to King report for good governance as

essentially being effective, ethical leadership. King believes that leaders

should direct the company to achieve sustainable economic, social and

environmental performance.

Module II Corporate Governance and Business Ethics

Module II

Corporate Governance Theories

The following theories elucidate the basis of corporate governance:

(a)    Agency Theory

(b)    Shareholder Theory

(c)    Stake Holder Theory

(d)    Stewardship Theory

Agency Theory

According to this theory, managers act as 'Age nts' of the corporation. The owners or directors set the central objectives of the corporation. Managers are responsible for carrying out  these objectives in  day-to-day work of the company. Corporate Governance is control of management through designing the structures and processes.

In agency theory, the owners are the principals. But principals may not have knowledge or skill for getting the objectives executed. The principal authorises the mangers to act as 'Agents' and a contract between principal and agent is made. Under the contract of agency, the agent should act in good faith. He should

protect the interest of the principal and should remain faithful to the goals.

In modern corporations, the shareholdings are widely spread. The management (the agent) directly or indirectly selected by the shareholders (the Principals), pursue the objectives set out by the shareholders. The main thrust of the Agency Theory is that the actions of the management differ from those required by the shareholders to maximize their return. The principals who are widely scattered may not be able to counter this in the absence of proper systems in place as regards timely disclosures, monitoring and oversight. Corporate Governance puts in place such systems of oversight.

Stockholder/shareholder Theory

According to this theory, it is the corporation which is considered as the property of shareholders/ stockholders.

They can dispose of this property, as they like. They want to get maximum return from this property.

The owners seek a return on their investment and that is why they invest in a corporation.  But this narrow role has been expanded into overseeing the operations of the corporations and its mangers to ensure that the corporation is in compliance with ethical and legal standards set by the government. So the directors are responsible for any damage or harm done to their property i.e., the corporation. The role of managers is to maximize the wealth of the shareholders. They, therefore should exercise due diligence, care and avoid conflict of interest and should not violate the confidence reposed in them. The agents must be faithful to shareholders.

Stakeholder Theory

According to this theory, the company is seen as an input-output model and all the interest groups which include creditors, employees, customers, suppliers, local-community and the government are to be considered. From their point of view, a corporation exists for them and not the shareholders alone.

The different stakeholders also have a self interest. The interest of these different  stakeholders is at times conflicting. The managers and the corporation are responsible to mediate between these different stakeholders interest. The stake holders have solidarity with each other. This theory assumes that stakeholders are capable and willing to negotiate and bargain with one another. This results in long term self interest.

The role of shareholders is reduced in the corporation. But they should also work to  make their interest compatible with the other stake holders. This requires integrity and managers play an important role here.

They are faithful agents but of all stakeholders, not just stockholders.

Stewardship Theory

The word 'steward' means a person who manages another's property or estate. Here, the word is used in the sense of guardian in relation to a corporation, this theory is value based. The managers and employees are to safeguard the resources of corporation and its property and interest when the owner is absent. They are like a caretaker. They have to take utmost care of the  corporation. They should not use the property for their selfish ends. This theory thus makes use of the social approach to human nature.

The managers should manage the corporation as if it is their own corporation. They are not agents as such but occupy a position of stewards. The managers are motivated by the principal's objective and the behavior pattern is collective, pro-organizational and trustworthy. Thus, under this theory,  first of all values as standards are identified and formulated. Second step is to  develop training programmes that help to achieve excellence. Thirdly, moral support is important to fill any gaps in values.

REGULATORY FRAMEWORK OF CORPORATE GOVERNANCE IN INDIA

Corporate Governance means set of rules and regulations by which an organization is governed, controlled and directed. It is conducted by the Board of Directors or the concerned committee for the benefit of the company’s stakeholders. The Indian statutory framework has, by and large, been in consonance with the international best practices of corporate governance. Broadly speaking, the corporate governance mechanism for companies in India is enumerated in the following enactments/ regulations/ guidelines/ listing agreement:

1. The Companies Act, 2013. The new Companies Law contains many provisions related to good corporate governance like Composition of Board of Directors, Admitting Woman Director, Admitting Independent Director, Directors Training and Evaluation, Constitution of Audit Committee, Internal Audit, Risk Management Committee, SFIO Purview, Subsidiaries Companies Management, Compliance center,etc. All such provisions of new Company Law are instrumental in providing a good Corporate Governance structure.

2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory authority having jurisdiction over listed companies and which issues regulations, rules and guidelines to companies to ensure protection of investors.

3. Standard Listing Agreement of Stock Exchanges: For companies whose shares are listed on the stock exchanges.

4. Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI): ICAI is an autonomous body, which issues accounting standards providing guidelines for disclosures of financial information. Section 129 of the New Companies Act inter alia provides that the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under s 133 of the New Companies Act. It is further provided that items contained in such financial statements shall be in accordance with the accounting standards.

5. Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI): ICSI is an autonomous body, which issues secretarial standards in terms of the provisions of the New Companies Act. So far, the ICSI has issued Secretarial Standard on "Meetings of the Board of Directors" (SS-1) and Secretarial Standards on "General Meetings" (SS-2). These Secretarial Standards have come into force July 1, 2015. Section 118(10) of the New Companies Act provide that every company (other than one person company) shall observe Secretarial Standards specified as such by the ICSI with respect to general and board meetings.

Securities and Exchange Board of India (SEBI) guidelines 

SEBI is a regulatory authority established on April 12, 1992. SEBI was established with the main purpose of curbing the malpractices and protecting the interest of its investors. Its main objective is to regulate the activities of Stock Exchange and at the same time ensuring the healthy development in the financial market. In order to ensure good corporate governance SEBI came up with detailed Corporate Governance Norms.

1.      As per the new rules the companies are required to get shareholders approval for RPT (Related Party Transactions), it established whistle blower mechanism, clear mandate to have at least one woman director in the Board and moreover it elaborated disclosures on pay packages.

2.      Clause 35B of the Listing Agreement is being amended by the regulatory authority. Now as per the amended clause, Listed companies are required to provide the option of e-voting to its shareholders on all proposed or passed at general meetings. Those who do not have access to e-voting facility, they should be provided to cast their votes in writing on Postal Ballot. There was the need to amend the provision so that the provisions of the listing agreement can be aligned with the provisions of Companies Act, 2013. By doing so an additional requirement can be provided to strengthen the Corporate Governance norms in India with respect to Listed companies.

3.      Clause 49 of the Listing Agreement was also amended by SEBI in order to strengthen the Corporate Governance framework for Listed companies in India. The revised clause forbids the independent directors from being eligible for any kind of stock option. Whistle blower policy is also added in the revised clause whereby the directors and employees can report any unethical behavior, any fraud or if there is violation of Code of Conduct of the company. By the amendment Audit Committee is also enhanced, now it will include evaluation of risk management system and internal financial control, will keep a check on inter-corporate loans and investments. The amendment now requires all the companies to form a policy for the purpose of determination of ‘material subsidiaries’ and that will be published online.

SEBI ALSO IMPLEMENTED VARIOUS REGULATIONS FOR EFFECTIVE WORKING OF THE COMPANIES, FEW OF THESE REGULATIONS ARE AS FOLLOWS-

1.      SEBI (Issue of Capital and Disclosure Requirements) regulation, 2009. This Regulation contains provisions for public issue wherein the issuer shall satisfy the conditions mentioned under the regulation, it also contains provisions regarding restriction on right issue. It also contains provisions regarding listing of Securities on stock exchange wherein in-principle is to be obtained by the issuer from recognised stock exchange.

2.      SEBI (Listing obligations and Disclosure Requirements), 2015. The LODR Regulations were notified with the aim of simplifying the existing provisions of listing agreements for different segment of capital markets like convertible and non-convertible debt securities, equity shares etc. it requires all listed entities to make disclosure and abide by the provisions of these regulations. The intent here is to ensure that once the shares of a company is listed on a Stock Exchange they are easily accessible to the normal public. 

3.      SEBI (Prohibition of Insider Trading) Regulations,2015. Insider trading per se is not a violation of Law but what is prohibited is trading by an insider on the basis of Non-public information. To prevent such trading SEBI came up with this regulation. Under this, the restriction is corporate insiders who arrive at trading decisions by using the price sensitive information directly or indirectly.

4.      SEBI came up with many other regulations like Regulation on Fraudulent and Unfair Trade Practices, Regulations on Substantial Acquisition of Shares and Takeovers, Issue of Sweat Equity etc. The main aim behind coming up with such Regulation, rules etc is to ensure good corporate governance in a company. 

Listing agreement – Applicable to the listed companies

SEBI has amended the Listing Agreement with effect from October 1, 2014 to align it with New Companies Act. Clause 49 of the Listing Agreement can be said to be a bold initiative towards strengthening corporate governance amongst the listed companies. This Clause intends to put a check over the activities of companies in order to save the interest of the shareholders. Broadly, clause 49 provides for the following:

1. Composition of Board

·         Optimum Combination of Executive & Non Executive Directors,

·         Not less than 50% of the board should comprise Non-Executive Directors,

·         At Least one Women Director,

·         A relative of a promoter or an executive director shall not be regarded as an independent director.

·         Where chairman is non executive Director as least 1/3^rd of the board should comprise Independent Director, and if

·         Chairman is executive director then ½ of the board should comprise Independent Director.

Chairman	Executive Director	1/2  of Board shall be Independent Director
Chairman	Non-Executive Director	1/3rd of Board shall be Independent Director

2. Audit Committee

The audit committee is a committee of the board of directors responsible for oversight of the financial reporting process, selection of independent auditor, receipt of audit results from both internal & external auditors. The committee assists the board to fulfil its corporate governance and overseeing responsibilities in relation to an entity’s financial reporting, internal control system.

·         Minimum 3 directors shall be the members of Audit Committee,

·         2/3^rd shall be the Independent Director

·         All the members shall be financially literate & at least one member must have expertise in accounts & finance field.

·         Chairman shall be Independent Director and must be present at annual general meeting.

At least four meeting in a year shall be held by audit committee with maximum time gap between two meetings shall not be more than 120 days. Quorum shall either two members or 1/3^rd members of the committee which shall be higher but at least two independent directors must be present.

Powers of Audit Committee

·         To investigate any activity within its terms of reference,

·         To seek information from any employee,

·         To obtain outside or legal advice,

·         To secure attendance of outsider with relevant expertise, if any

Role of Audit Committee

·         Overseeing the Financial reporting and disclosure process,

·         Monitoring choice of accounting policies and principles,

·         Overseeing hiring, performance and independence of the external auditor

·         Oversight of regulatory compliance , ethics & whistle blower’s hotline

·         Monitoring the internal control process,

·         Overseeing the performance of internal audit function,

·         Discuss risk management policies etc.

3.Subsidiary Companies

o    At least one independent director on the Board of Directors of the holding company shall be a      director on the Board of Directors of a material non listed Indian subsidiary company.

o    The Audit Committee of the listed holding company shall also review the financial statements, in         particular, the investments made by the unlisted subsidiary company.

o    The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the Board of Directors of the listed holding company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company

4. Disclosure Requirements

Periodical disclosures relating to the financial and commercial transactions, remuneration of directors, etc, to ensure transparency. For good corporate governance company should make all necessary disclosures. It is also a responsibility on management to make disclosures of all material matters which all stakeholders are suppose to know. Stakeholders like creditors and customers can not attend meetings so the disclosure is only way through which they can get information

5. CEO/ CFO Certification

Any managing director, CFO or whole time finance director, who is in discharging of finance function, must certify to the board that the financial statements have been reviewed by him and present the true & fair view and do not contain any material untrue statement or misstatement.

He also indicate to auditor or audit committee if

·         There is any material change in internal control system,

·         Change in accounting policies,

·         Knowledge of any fraudulent activity being noticed by them

6. Report and Compliance

A company must give a separate section on Corporate Governance in annual report, where all the disclosures regarding compliance & non compliance with mandatory requirement and the extent to which non mandatory requirements have been adopted. Quarterly compliance report shall be given to stock exchange within 15 days from the date of closure

A separate section in the annual report on compliance with Corporate Governance, quarterly compliance report to stock exchange signed by the compliance officer or CEO, company to disclose compliance with non-mandatory requirements in annual reports