lab assignment apurwa shah

8/10/2019 Lab Assignment ApurWa sHah

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Report on Independent Directors: Are

they watchdogs for good governance

APURWA SHAH

2013PGP066

Section-C


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Table of Contents

Contents Page number

1. Introduction....02

2. Conceptual Discussion...05

2.1. Independent Directors Defined..05

2.2. Corporate Governance...06

2.3. Corporate Governance Framework07

3. Why have Independent Directors on the Board.............................. .09

4. Roles & Responsibilities of Independent Directors.10

5. Duties & Responsibilities of Independent Directors11

5.1. Towards Shareholders and Stakeholders12

6. Liabilities of Independent Directors.13

7. Corporate Governance & Independent Directors.15

8. Indian Context..18

9. Alternatives System Prevailing in other countries...23

10. Conclusion..29

11. Bibliography...30


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INTRODUCTION

An Independent Director (also sometimes known as a outside director) is a

director (member) of a board of directors who does not have a material orpecuniary relationship with company or related persons, except sitting fees.

Independent Directors do not own shares in the company. (Some sources state

non-executive directors are different from independent ones in that non-

executive director are allowed to hold shares in the firm while independent

directors are not. In the US, independent outsiders make up 66% of all boards

and 72% of S&P 500 company boards, according to The Wall Street Journal.

In India as of 2004, a majority of the minimum seven directors of public

companies having share capital in excess of Rs. 5 crore (Rs 50,000,000) should

be independent. Clause 49 of the listing agreements defines independent

directors as follows:

"For the purpose of this clause the expression 'independent directors' means

directors who apart from receiving director's remuneration, do not have any

other material pecuniary relationship or transactions with the company, its

promoters, its management or its subsidiaries, which in judgment of the board

may affect independence of judgment of the directors.

Maximum compensation or "sitting fee" as of 2004 was Rs. 20,000/-

Some researchers have complained that firms have appointed "independent

directors who are overly sympathetic to management, while still technically

independent according to regulatory definitions."

One complaint against the independence regulations is that CEOs may find

loopholes to influence directors. While the NYSE has a $1 million limit on

business dealing between directors and the firm, this does not include charitable


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contributions. Two critics of management influence over boards note that "a

director who is an officer or employee of a charitable organization can still be

considered independent even if the firm on whose board the director sits

contributes more than $1 million to that organization."

Corporate governance refers to the system by which corporations are directed

and controlled. The governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation (such as the

board of directors, managers, shareholders, creditors, auditors, regulators, and

other stakeholders) and specifies the rules and procedures for making decisions

in corporate affairs. Governance provides the structure through which

corporations set and pursue their objectives, while reflecting the context of the

social, regulatory and market environment. Governance is a mechanism for

monitoring the actions, policies and decisions of corporations. Governance

involves the alignment of interests among the stakeholders.

India's SEBI Committee on Corporate Governance defines corporategovernance as the "acceptance by management of the inalienable rights of

shareholders as the true owners of the corporation and of their own role as

trustees on behalf of the shareholders. It is about commitment to values, about

ethical business conduct and about making a distinction between personal &

corporate funds in the management of a company. It has been suggested that

the Indian approach is drawn from the Gandhian principle of trusteeship and theDirective Principles of the Indian Constitution, but this conceptualization of

corporate objectives is also prevalent in Anglo-American and most other

jurisdictions.

Our study makes the following contributions. First, ours is the first study to

examine the effect of deterrence for IDs on the entry and exit decisions of IDs,

board composition, ID remuneration and board monitoring.


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Second, we complement prior studies by identifying using a natural experiment

the effect of penalties suffered by IDs on their subsequent labor market

outcomes. Third, our study documents the unadulterated, market-based response

to a CG failure. Unlike the wave of CG failures in the U.S., which was followed

by the enactment of the Sarbanes-Oxley Act, the Satyam fiasco was not

followed by a regulatory response. As a result, the effects that we have studied

resulted from a pure, market-based response by firms to the externalities

engendered by the Satyam fiasco. Our results, therefore, lead us to conjecture

that the changes in board composition, director remuneration, D&O insurance

premiums, etc. documented by Linck et. al. (2008) as having resulted due to the

passage of the Sarbanes-Oxley Act may have resulted nevertheless due to

market-based responses following the wave of CG failures.

Fourth, our study highlights the differential effects of a CG failure in an

emerging market vis--vis the developed markets due to various market failures

that characterize emerging markets.


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CONCEPTUAL DISCUSSION

The Independent Director Defined

Independent Director means non-executive Director who, apart from receiving

directors remuneration, does not have any material/ pecuniary relationship or

transaction with the company, its promoters, its directors, its senior

management or its holding company, its subsidiaries and associates, which in

judgment of the Board may affect independence of judgment of the Director.

The Companies Act, 1956 do not specifically gives the definition of the

Independent Director. However clause 49 of the Listing Agreement gives the

definition.

As per revised clause 49 of the Listing Agreement the definition of the term

independent directors would mean a non-executive director who:

1. Does not have a pecuniary relationship with the company, its promoters,

senior management or affiliate companies.

2. Is not related to promoters or the senior management.

3. Has not been an executive with the company in the immediately three

preceding financial years.

4. Is not a partner or executive of the auditors/lawyers/consultants of the

company for the last three years.

5. Is not a supplier, service provider or customer of the company.

6. Does not hold 2 per cent or more of the shares of the company.

Senior management means personnel of the company who are members of its

core management team excluding the Board of Directors, and would comprise


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of all members of management one level below the executive directors,

including all functional heads.

Normally Nominee Directors of Bank or Financial Institution will not beconsidered as independent Director as per the Companies Act. However under

Clause 49 of the Listing Agreement issued by SEBI such Directors are

considered as independent Director.

INDIA

In India as of 2004, a majority of the minimum seven directors of public

companies having share capital in excess of Rs. 5crore (Rs 50,000,000) should

be independent. Clause 49 of the listing agreements defines independent

directors as follows:

"For the purpose of this clause the expression 'independent directors' means

directors who apart from receiving director's remuneration, do not have any

other material pecuniary relationship or transactions with the company, its

promoters, its management or its subsidiaries, which in judgment of the board

may affect independence of judgment of the directors."[1]

Maximum compensation or "sitting fee" as of 2004 was Rs. 20,000/-

Corporate governance

Corporate governance involves a set of relationships amongst the companys

management, its board of directors, its shareholders, its auditors and other

stakeholders. These relationships, which involve various rules and incentives,

provide the structure through which the objectives of the company are set, and

the means of attaining these objectives as well as monitoring performance are

determined. Thus, the key aspects of good corporate governance include
http://en.wikipedia.org/wiki/Crorehttp://en.wikipedia.org/wiki/Independent_director#cite_note-wcfcg-1http://en.wikipedia.org/wiki/Independent_director#cite_note-wcfcg-1http://en.wikipedia.org/wiki/Crore


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transparency of corporate structures and operations; the accountability of

managers and the boards to shareholders; and corporate responsibility towards

stakeholders.

Formally it can be defined as,

It is a system of structuring, operating and controlling a company

with a view to achieve long term strategic goals to satisfy shareholders,

creditors, employees, customers and suppliers, and complying with the legal

and regulatory requirements, apart from meeting environmental and local

community needs.

Corporate Governance Framework

The corporate governance framework should promote transparent and efficient

markets, be consistent with the rule of law and clearly articulate the division of

responsibilities among different supervisory, regulatory and enforcement

authorities.

The corporate governance framework should be developed with a view

to its impact on overall economic performance, market integrity and the

incentives it creates for market participants and the promotion of

transparent and efficient markets.

The legal and regulatory requirements that affect corporate governance

practices in a jurisdiction should be consistent with the rule of law,

transparent and enforceable.


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The division of responsibilities among different authorities in a

jurisdiction should be clearly articulated and ensure that the public

interest is served.

Supervisory, regulatory and enforcement authorities should have the

authority, integrity and resources to fulfill their duties in a professional

and objective manner. Moreover, their rulings should be timely,

transparent and fully explained.


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Independent directors and corporate governance

The concept of the institution of IDs is simple. They are expected to be

independent from the management and act as the trustees of shareholders. Thisimplies that they are obligated to be fully aware of and question the conduct of

organizations on relevant issues.

After the break out of some of the largest corporate scams in the country in

recent times and the subsequent increase in the number of resignations by IDs,

there is a heightened focus on their role and responsibilities as custodians of

stakeholders interests. The proposed Companies Bill, 2011, the Corporate

Governance Voluntary Guidelines 2009 and General Circular No. 08/2011

issued by Ministry of Corporate Affairs have further stepped up their interest in

this subject.

An independent director is a person having many years of experience and acts

as a guide for the company. The role they play in a company broadly includes

improving corporate credibility and governance standards, function as

watchdog, play a vital role in risk management. Independent Director plays an

active role in various committees to be set up by a company to ensure good

governance. Listed companies are required to set up audit committees of

minimum three directors, on which, two-thirds should be Independent Director.

WHY HAVE INDEPENDENT DIRECTORS ON THE BOARD?

There are several distinct benefits that an independent board of directors canbring to a company, ranging from long-term survival to improved internalcontrols.Independent directors in the board can:

Counter balance management weaknesses in a company.

ensure legal and ethical behaviour at the company, while strengthening

accounting controls

extend the reach of a company through contacts, expertise, and accessto debt and equity capital


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be a source of well-conceived, binding, long-term decisions for acompany

help a company survive, grow, and prosper over

time through improved succession planning through membership in the

nomination committee etc.

ROLE & RESPONSIBILITY OF INDEPENDENT DIRECTORS

The role and responsibility of an Independent Director arising out clause 49

requirements of role of audit committee would include

1. Oversight of company financial reporting process and disclosure of its

financial information.

2. Recommending to Board on the appointment, re-appointment and if required

replacement or removal of statutory auditor and fixation of audit fees.

3. Review with management, the annual financial statements before approval by

the board with particular reference to Directors Responsibility Statement,

changes in accounting policy, major accounting estimates, audit findings

adjustments, compliance with listing and other legal requirements, disclosure of

related party transactions and qualification in the draft audit report.

4. Review of quarterly financial statements.

5. Review with management, performance of statutory and internal auditors,

adequacy of internal control systems, adequacy of internal audit function

including their structure, frequency, reporting.

6. Discussing significant finding of internal auditors, including internal

investigations made by them into areas of fraud, irregularities or major failures

of internal control systems.

7. Discussing with auditors on the scope of the audit.


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8. Reviewing reasons for defaults into payments.

9. Reviewing the whistle blower mechanism.

10. Mandatory review must be made of related party transactions and internal

control weaknesses.

11. Review financial statements of subsidiary companies with special attention

to investments made by them.

12. Review uses/application of funds from public issues, rights issues,

preferential issues etc.

13. Disclose shareholdings in the listed company.

DUTIES & RESPONSIBILITIES OF AN INDEPENDENT DIRECTOR

The duties and responsibilities of independent Directors are normally as they

are of director of the Company:

1. He should furnish information in the prescribed form to the company about

disclosure of General Notice of directorship, membership of body corporate and

other entities.

2. He should also inform the Company about any change in the details

submitted subsequently.

3. He should provide a list of his relatives as defined in the Companies Act and

their directorship and interest in other concerns.

4. The Director shall have fiduciary duty to act in good faith and in the interest

of the company.


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5. It is the duty of the Independent Director to acquire proper understanding of

the business of the Company.

6. He should act only within the powers laid down by the Memorandum ofAssociation and Articles of Association and by applicable law and regulations.

7. He should not be a Director of more than fifteen Companies.

Such an Independent Director could be working as member of Audit Committee

prescribed under Section 292A of the Companies Act. In such situation he has

to look into the obligations of Audit Committee and perform the duty.

Towards shareholders and stakeholders

The shareholders, especially the minority shareholders, look to independent

directors providing transparency in respect of the disclosures in the working of

the company as well as providing balance towards resolving conflict areas. In

evaluating the boards or management decisions in respectof employees,

creditors and other suppliers of major service providers, independent directors

have a significant role in protecting the stakeholders interests.

One of the mandatory requirements of audit committee is to look into the

reasons for default in payments to deposit holders, debentures, non-payment of

declared dividend and creditors. Further they are required to review the

functioning of the Whistle Blower mechanism and related party transactions.

These, essentially, safeguard the interests of the stakeholders


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LIABILITIES OF INDEPENDENT DIRECTORS

All said and done, independent directors nevertheless owe the same degree of

fiduciary duties to the company. In Sheahan (as liquidator of SA Service

Stations) v Verco & Hodge [2001] SASC 91 (a case which dealt with non-

executive directors, but which principles are equally applicable to independent

directors), the Australian court observed that whilst non-executive directors

were not under any obligation to carry out a detailed inspection of the day-to-

day activities of the company, they did owe a duty to be aware of the true

financial position and capability of the company and to act appropriately if there

were reasonable grounds to expect that the company would not be able to pay

its debts.

In the earlier decision of Daniels v Anderson [1995] 13 ACLC 614 (also a case

which dealt with non-executive directors, but which principles are equally

applicable to independent directors), however, the court was willing to find no

liability given reasonable reliance on management and the auditors in view of

the functions assigned to them. In particular, the court held as follows:

The evidence of the non-executive directors developed in quite some detail their

understanding and experience of the division of functions between the Board

and management. The directors rely on management to manage the corporation.

The Board does not expect to be informed of the details of how the corporation

is managed. They would expect to be informed of anything untoward or

anything appropriate for consideration by the Board. In the context of the

present case directors rely on management:

(a) to carry out the day-to-day control of the corporations business affairs,


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CORPORATE GOVERNANCE & INDEPENDENT DIRECTORS

Adam Smith, way back in the late 18th century, described an invisible hand

of self-interest that motivated the proliferation of business.8 Arguably, the

situation may have changed today, however what has also come to be of

concern with regard to corporations is the self-interest in the working of

directors within it.

Governance, it is said, is about steering a company in the right direction.

The former SEBI Chairman, Mr M. Damodaran, described corpo-rate

governance as a continuing process beyond the scope of mere legislation.9

What he implied was that governance mandates practices for which the

legisla-tive requirements should only be the starting point. Companies must

pay heed to these practices not because of fear of sanction, but because in the

absence of such governance the companies would fail to achieve true

profitability. In his address, the former Chairman spoke of independent

directors as functionar-ies who contribute to the Board with their divergent

views. Another speaker referred to them as the conscience keepers who

could guide the company towards its right interests when others may have

been influenced by other interests.

Other thinkers have described corporate governance differently. While some

have thought of it as a journey and not a destination, a few have compared it

to trusteeship. But irrespective of these different approaches, the subject

matter and purpose of corporate governance remains undisputedeven more

so vis--vis the role played by independent directors.


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Independent directors broadly fit into the overall structure of corporate

governance. Their appointment ensures an effective and balanced

composition of the boards. It is widely recognized that the board of directors

is the most significant instrument of compliance with corporate governance.

Ergo, the constitution of this board and its supervision is of utmost

importance.

Putting this in perspective, the guidelines for the selection of independent di-

rectors are fortified by regulatory mechanisms which seek not only to

provide for the qualification of these directors but also to secure a minimum

fixed pro-portion of such independent directors on the board.

The independent directors contribute to the board by construc-tively

challenging the development of policy decisions and company strategies.

They also scrutinize the performance of the management and hold them ac-countable for their actions. Their independence, on account of lack of

affiliation which is likely to prejudice their decisions, allows them to fulfil

these tasks more efficiently. While they are answerable for the companys

actions, they are less likely to be affected by self-interest in these actions.

This puts them in a unique and advantageous position to question thecompanys practices. It is because of this fact that, in practice, independent

directors have conventionally been viewed as adversaries within the board.

Their position has, however, gradually become more acceptable with the re-

alization that independent directors bring something more to the table. Even

when they stand in opposition to the other directors, the tension created

within the board is nothing but positive tension. In the long run, independent

directors bring with themselves a more balanced perspective.


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The independent directors must meet at least once a year without the

chairman or the executive directors and a statement in the annual report

declares whether such a meeting was conducted or not.This is, again, to en-

courage the independent and uninfluenced judgment of the independent

direc-tors while keeping in mind the accountability owed to the shareholders

of the company and to dissuade any self-interest to creep into the

management of the affairs.

Apart from attending the annual general meetings and discuss-ing the issues

relating to their non-executive roles (which may vary depending on the

company), they periodically review legal compliance reports prepared by the

company and review the steps taken by the company to rectify any

shortcomings.

What is interesting to note is the considerable effort, via institu-tionalguidelines, to encourage the appointment of independent directors. For

instance, the New York Stock Exchange regulations demand that a majority

of the board of directors of a listed company comprise independent directors,

for which it provides a stringent qualification. In addition, companies listed

on the exchange must compulsorily have certain committees (such as

Corporate Governance Committee, Audit Committee, etc.) which mustconsist only of independent directors. Ever since the practice of appointment

of independent directors has been recognized as a legitimate means to bring

about more trans-parency in corporate governance, increasingly more

countries have adopted similar guidelines.


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THE INDIAN CONTEXT

1. Conventionally Wrong: The Past Record

In the past, the Indian corporate sector has faced major criticism for its poor

corporate governance compliance record, as the presence of large family-

dominated businesses has posed serious threats to transparency and ac-

countability. Traditionally, the major stakeholders in most of these

enterprises have been family members who did not find it compelling to

reveal sufficient information to the independent directors. Keeping a check

on accountability and transparency became an arduous task for the

independent directors espe-cially because they attended very few meetings

per year which were to a large extent ceremonial in nature. This did not

make it possible for independent di-rectors to fully comprehend the issues

before the board and to be accountable in large business structures which

were often conglomerates having diverse in-terests and investments. This

may be contrasted with the more efficient western enterprises where

independent directors are viewed as partners of management and as outside

guardians,11 whose job is to make sure that the management stays focused

on delivering shareholder value.

2. The New Clause 49: Independent Directors Get a Boost

In India, the SEBI monitors and regulates corporate governance of listed

companies through Cl. 49 of the Listing Agreement. Influenced by the

Sarbanes-Oxley Act of 2002 in the United States of America and the New

York Stock Exchange regulations in 2003, SEBI launched a landmark


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initiative towards achieving higher corporate governance standards. SEBI

issued Cl. 49 of the Listing Agreement which was to apply to companies in a

phased manner. It applied first to all Group-A companies and then to other

listed companies with a minimum paid-up capital of Rs. 10 crore / net worth

of Rs. 25 crore and finally to companies with paid up capital of Rs. 3 crore /

net worth of Rs. 25 crore. Later, SEBI amended the original clause and

issued a new Cl. 49 with several changes.

The new Cl. 49 lays down a more stringent qualification for in-dependent

directors than the old clause and took away the discretionary power.

conferred upon the board to decide whether the independent directors

material relationship with the company had affected his independence apart

from in-creasing the number of mandatory board meetings from 3 to 4. The

minimum number of audit committee meetings was also increased from 3 to

4.

As already discussed,Cl. 49 lays down an inclusive definition wherein

independent directors are those directors who do not have a pecuniary

relationship with the company, its promoters, management or its subsidiaries,

which may affect the independence of their judgment. This is in contrast

with the British definition based on the Higgs report, which is an exclusive

definition specifying who cannot be appointed as an independent director.The latter appears to be more appropriate as it clearly provides who is not

acceptable as an independent director while the Indian definition seems too

restrictive.

Corporate governance framework in India


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The corporate governance framework in Indiaprimarily consists of the

following

Legislations and regulations:

The Companies Act, 1956: Companies in India, whether listed or

unlisted, are governed by the Companies Act. The Act is administered

by the Department of Companies Act (DCA). Among other things, the

Act deals with rules and procedures regarding incorporation of a

company; prospectus and allotment of ordinary and preference shares

and debentures; management and administration of a company; annual

returns; frequency and conduct of shareholders meetings and

proceedings; maintenance of accounts; board of directors, prevention of

mismanagement and oppression of minority shareholder rights; and the

power of investigation by the government, including powers of the CLB.

The Securities Contracts (Regulation) Act, 1956: It covers all types of

tradable government paper, shares, stocks, bonds, debentures, and otherforms of marketable securities issued by companies. The SCRA defines

the parameters of conduct of stock exchanges as well as its powers.

The Securities and Exchange Board of India (SEBI) Act, 1992: This

established the independent capital market regulatory authority, SEBI,

with the objective to protect the interests of investors in securities, andpromote and regulate the securities market.

The Depositories Act, 1996: This established share and securities

depositories, and created the legal framework for dematerialization of

securities.

Listing Agreement with stock exchanges: These define the rules,

processes, and disclosures that companies must follow to remain as listed


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entities. A key element of this is Clause 49, which states the corporate

governance practices that listed companies must follow.

The Committee Reports and Suggestions

The J.J. Irani Committee, 200421(the Committee) recommended that the

provisions of Cl. 49 be extended to apply to all large companies.22 The

Committee reaffirms the belief that the issue of corporate governance and

independent directors are closely intertwined and presence of such directors

in adequate numbers would improve governance.

With respect to widening the ambit of Cl. 49, the Committee sug-gests an

approach which is sensitive to the specific kinds of companies and disagrees

with a one shoe fits all philosophy. Wherever a company involves public

interest, at least 1/3rd of the board must consist of independent directors. Onthe issue of nominal directors on the board who are representative of in-

stitutions, the Committee in clear terms recommends that such directors must

not be equated with independent directors since they represent only sectional

interests. It also elaborates on situations where independence may exist and

may not exist.

The Report of the Kumar Mangalam Birla Committee (the Birla

Committee),23 1999 on Corporate Governance had criticized the

conventional practice of hand-picking of independent directors because such

selection by itself takes away the independence of the directors. This

loophole is yet to be fully addressed and still presents itself as a paradox-

how independent can a director be if he is dependent on the promoters for his

job?


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Another shortcoming which has not been sufficiently set-off is the

remuneration offered to independent directors. The Birla Committee was of

the view that adequate compensation packages must be given to independent

directors so that their positions become financially attractive to draw talent

and ensure integrity in their working.

Companies Act and Independent Directors

The Companies Act looks at all kinds of directors in the same light. While it

provides for a few extra compliances for whole time directors and requires

the disclosure by interested directors, it does not exempt inde-pendent

directors from any of the duties, liabilities or responsibilities of the board.

Therefore, independent directors are woven into the corporate govern-ance

team (after all that is the very purpose of their appointment) as any other

director and are bestowed with the same power as the other directors.

267 to 26925 are applicable only to whole-time directors, while 274,26

284,27 291,28 297,29 29930 and 30031 are applicable to all directors.

309(4) allows for separate limits and restriction to be made applicable on

the remuneration of independent directors.

Apart from the liabilities that the director may invite as a cor-porate director,

there may be other liabilities under other laws as well. Any communications

addressed to the directors of the company are understood to address the

independent directors as well.

For instance, in the WorldCom and Enron settlements, the liabilities

extended to the independent directors to the tune of $18 million by 10


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independent directors in WorldCom and $13 million by 10 independent

directors in Enron. However, in the Indian context it may be argued that

liability arises only on account of conduct or act or omission on part of the

director to fulfill certain obligation, and not be the mere fact of holding an

office.

Themain provisions dealing with Corporate Governance in the Indian

Companies Actare given in the table below:-

ALTERNATIVE SYSTEMS PREVAILING IN OTHER COUNTRIES

Traditionally, corporate governance systems have been divided into two

categories, viz. the outsider model and the insider model.

The Outsider Model of Corporate Governance


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The outsider model of corporate governance can be found mostly in the

developed world. At the outset, it would be appropriate to describe the core

features of an outsider system of corporate governance, which are 1) dispersed

equity ownership with large institutional holdings; 2) the recognised primacy of

shareholder interests in the company law; 3) a strong emphasis on the protection

of minority investors in securities law and regulation; and 4) relatively strong

requirements for disclosure

US and UK

The U.S. and the U.K., which have been at the vanguard of the independent

director movement, follow the classic outsider model of corporate

governance, with dispersed shareholding. This gives rise to agency problems

between managers and shareholders arising out of the separation of ownership

and control. The institution of independent directors has seemingly been

introduced as protection for shareholder interests against actions of managers in

public companies with dispersed shareholders. However, other jurisdictions (to

which the independent director concept was transplanted) follow the insider

model of corporate governance where ownership and control are relatively

closely held by cohesive groups of insiders.

Overview of UK Corporate Governance Norms

The UK Corporate Governance Code 2010 is overseen by the Financial

Reporting Council (FRC). The Listing Rules 2000 require that public listed

companies disclose how they have complied with the code, and explain where

they have not applied the code - in what the code refers to as 'comply or explain'

. However there is no requirement for disclosure of compliance in private

company accounts.


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Main Principles of the US Sarbanes-Oxley Act

Principle I:Ensuring the Basis for an Effective Corporate Governance

Principle II:The Rights of Shareholders and Key Ownership Function

Principle III:The Equitable Treatment of Shareholders

Principle IV:Disclosure and Transparency

Principle V:The Responsibilities of the Board

These practices have been greatly stimulated by stricter listing requirements on

both the New York Stock Exchange (NYSE) and NASDAQ.

India, US and UK Corporate Governance Norms - A Comparative

Approach

A comparative analysis was done between the US, UK and India to gain

insights into the Corporate governance system in these countries.


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A substantial shareholder still retains his independence status according to the

UK combined code, whereas India and the US exclude substantial shareholders

from becoming independent directors.

The Audit committee comprises of only Independent directors in case of UK,

while India and the US have a more relaxed composition of 2/3rd and a

minimum of 3 independent directors respectively.

Supportive whistle-blowers protection laws are in place in both the US and the

UK, whereas India doesnt have a law for the same

Independent Directors in China in contrast to India

In India, there is a spectrum of companies, such as Infosys (INFY), which on

some dimensions is better governed than companies in the West in terms of how

quickly it discloses things and how quickly it complies with Nasdaq norms. Atthe other end of the spectrum you have companies that are still the fiefdoms of

families, many of which are badly governed. But even those companies are

accountable to the market. Market pressures will force them to clean up their act

to some extent. The equity markets function so well that it's hard to believe you

could be a continuous violator of norms of good governance and still have

access to the equity markets.

Whereas in China, the financial markets still don't work in the sense that we

think of them working in the U.S. In China, all stock prices move together.

They move up on a given day or they move down. There is no company-

specific information embodied in the stock price. You can't possibly decide that

a company is good or bad because the market isn't working in that sense. What

you see is aggregate enthusiasm, or lack thereof, for China Inc. The market is


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not putting pressure on managers to behave in ways that approximate corporate

governance in the West.

CONCLUSION

A solution to eliminate, the cosy relationship between independent directors and

their companies can be found by creating an independent body under SEBI. It is

this organisation which will be charged with the role of screening and recruiting

independent directors and placing them with listed companies. All fees and

allowances to the independent directors are paid by the independent

organisation under SEBI. The organisation should be funded through a special

levy charged by SEBI from each listed company based on the turnover of the

company.

In the selection of independent directors we must not look simply for high

profile names. The issue is not of lending a brand but having someone with an

independent state of mind. In an economy fired by innovation, our biggest threat

is obsolescence. Periodic training of directors is a must. Unfortunately there are

few courses designed primarily for directors. Warren Buffet recently lamented

about the failure of independent directors to protect the interest of shareholders.

He blamed the cosy "boardroom culture" with "well-mannered people" finding

it almost impossible to suggest replacing the chief executive. He said that

questioning their remuneration would be like "Belching at the dinner table".

Independent directors are our only hope to instil some discipline in the murky

world of corporate finance. We have to make sure that greed plays no part in

their appointment - even if it means "belching at the dinner table". The IDs can

play the crucial role of bringing objectivity to the decisions made by the board

of directors by playing a supervisory role. While they need not take part in the


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companys day-to-day affairs or decision making, they should ask the right

questions at the right time regarding the boards decisions.

Raising the appropriate red flags at the right time would help them in avoidingthe occurrence of unwanted situations and their consequences to a great extent

BIBLIOGRAPHY

1. http://en.wikipedia.org/wiki/Main_Page

2.

http://tejas.iimb.ac.in/articles/104.php

3. http://www.ey.com

4. https://www.wirc-icai.org

5. http://www.icaiejournal.org

6. ROLE & RESPONSIBILITIES OF INDEPENDENT DIRECTORS

- By S.Gopalakrishnan

7.http://www.kpmg.com
http://tejas.iimb.ac.in/articles/104.phphttp://tejas.iimb.ac.in/articles/104.phphttps://www.wirc-icai.org/https://www.wirc-icai.org/http://www.icaiejournal.org/http://www.icaiejournal.org/http://www.icaiejournal.org/https://www.wirc-icai.org/http://tejas.iimb.ac.in/articles/104.php


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