narayan murthy report

7/28/2019 Narayan Murthy Report

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CORPORATE GOVERNANCE BY NARAYANA MURTHY

The organizational framework for corporate governance initiatives in India

consists of the Ministry of Corporate Affairs (MCA) and the Securities and

Exchange Board of India (SEBI). The first formal regulatory framework for

listed companies specifically for corporate governance was established by the

SEBI in February 2000, following the recommendations of Kumarmangalam

Birla Committee Report. It was enshrined as Clause 49 of the Listing

Agreement.

Thereafter SEBI had set up another committee under the chairmanship of Mr.

N. R. Narayana Murthy, to review Clause 49, and suggest measures to improve

corporate governance standards. Some of the major recommendations of the

committee primarily related to audit committees, audit reports, independentdirectors, related party transactions, risk management, directorships and director

compensation, codes of conduct and financial disclosures.

The Ministry of Corporate Affairs had also appointed a Naresh Chandra

Committee on Corporate Audit and Governance in 2002 in order to examine

various corporate governance issues. It made recommendations in two key

aspects of corporate governance: financial and non-financial disclosures: and

independent auditing and board oversight of management.

It had also set up a National Foundation for Corporate Governance (NFCG) in

association with the CII, ICAI and ICSI as a not-for-profit trust to provide a

platform to deliberate on issues relating to good corporate governance, to

sensitise corporate leaders on the importance of good corporate governance

practices as well as to facilitate exchange of experiences and ideas amongst

corporate leaders, policy makers, regulators, law enforcing agencies and non-

government organizations.

The SEBI Committee was constituted under the Chairmanship of Shri N. R.

Narayana Murthy, Chairman and Chief Mentor of Infosys Technologies

Limited. The Committee comprised members from various walks of public and

professional life. This included captains of industry, academicians, public

accountants and people from financial press and industry forums.

The terms of reference of the committee were to:

To review the performance of corporate governance; and


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To determine the role of companies in responding to rumour and otherprice sensitive information circulating in the market, in order to enhance

the transparency and integrity of the market.

The issues discussed by the committee primarily related to audit committees,audit reports, independent directors, related parties, risk management,

directorships and director compensation, codes of conduct and financial

disclosures.

The committee's recommendations in the final report were selected based on

parameters including their relative importance, fairness, accountability,

transparency, ease of implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

strengthening the responsibilities of audit committees; improving the quality of financial disclosures, including those related to

related party transactions and proceeds from initial public offerings;

requiring corporate executive boards to assess and disclose business risksin the annual reports of companies;

introducing responsibilities on boards to adopt formal codes of conduct;the position of nominee directors; and

stock holder approval and improved disclosures relating to compensationpaid to non-executive directors.

Non-mandatory recommendations included:

moving to a regime where corporate financial statements are notqualified;

instituting a system of training of board members; and

evaluation of performance of board members.As per the committee, these recommendations codify certain standards of 'good

governance' into specific requirements, since certain corporate responsibilities

are too important to be left to loose concepts of fiduciary responsibility. Their

implementation through SEBI's regulatory framework will strengthen existing

governance practices and also provide a strong incentive to avoid corporate

failures.


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The Committee noted that the recommendations contained in their report can be

implemented by means of an amendment to the Listing Agreement, with

changes made to the existing clause 49.

narayan murthy report

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