CHAPTER-VII CORPORATE GOVERNANCE AND PUBLIC SECTOR UNDERTAKINGS Introduction: Corporate Governance has succeeded in attracting a good deal and public interest because of its apparent importance for the economic health of corporations and society in general. Corporate Governance is a field in business that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms such as contracts, organizational designs and legislations. Good corporate governance in public enterprises implies attention to issues larger than those of law and stock exchanges. They need to address the principles of government and public enterprise relationship and create the fundamental pillars based on which the governing board can become effective. In the light of this, an attempt has been made to examine the extent to which the sample PSUs have complied with the Clause 49 of listing agreement. For the convenience of the researcher, this chapter divided into two parts. First part focuses on the meaning, importance of corporate governance and the Clause 49 of the listing agreement, and in Second Part, an attempt has been made to know the degree of compliance with the Clause 49 of listing agreement. PART-I Corporate Governance is the system by which companies are directed and controlled. It deals with the ways in which suppliers of finance to corporate assures themselves of getting a return on their investment. In simple words, the corporate governance explains the management of a company. Management of a company broadly includes planning, organization, staffing, direction, controlling, budgeting, and reviewing. Management of modern corporations yield enormous powers over the lives of many people, through their decisions
214 on such important aspects as location of new plants, or closing of old plants, supplier contracts, decisions on hiring and lay offs, on pricing, investments and technology choices. The board of directors is responsible and accountable to its shareholders (owners) and stakeholders (government, employees, tax collection authorities, creditors, suppliers of goods, banks, financial institutions, customers and society at large). Corporate governance is a combination of corporate ethics, corporate transparency as well as corporate accountability. It means a set of core principles followed by a corporate entity, emerging from its human values as reflected in its performance. It denotes decision and control of the affairs of a company. It is also said as the relationship between owners and managers in directing and controlling companies as a separate legal entity. An effective corporate governance system should provide mechanism for regulating directors' duties in order to restrain them from abusing their powers and to ensure that they act in the best interests of the company in its board. Corporate governance has been defined as system of structuring, operating and controlling a company with a specific aim of fulfilling the long term strategic goals of the owners; consider and care for the interests of employees, past, present and future; take account of the needs of the environment and local community; maintain excellent relations with both customers and suppliers; maintain proper compliance with all the applicable legal and regulatory requirements. Corporate Governance encircles with certain basic premises such as: 1. Sound Management: The board of directors should adopt sound management policies leading to adequate Return On Investment (ROI). 2. Fiduciary Relationship: Fiduciary Relationship where-in owner, managers or professional managers must adhere to strictly to their role relationships, refrain from unethical practices and think in terms of protecting the natural resources and society as a whole.
215 3. Responsibility: Board of directors are responsible for governance of their companies. Shareholders role is to appoint the directors and auditors and satisfy themselves that an appropriate structure is in place. The responsibilities of board of directors include selecting the company's strategic aims, providing the leadership put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. 4. Accountability: The basic corporate governance issue relating to the accountability is largely the matter of directors' disclosure of transparency, of explaining a company's activities to which the corporation has responsibilities. Corporate Governance is the burning concept, which cannot be static in nature. It refers to management of corporate affairs by board of directors and renders report to the shareholders to whom they are accountable. But all the matters of good corporate governance cannot be introduced as statutory provisions. Hence, many established companies have voluntarily adopted the methods of good corporate governance. THE SEBI AND CORPORATE GOVERNANCE: The SEBI has made listed companies and companies proposed to be listed in the corporate sector, to adopt several measures to improve the standards of corporate governance. According to the Clause 49 of listing agreement, a listed company should take the following steps: 1. Board of Directors - Composition: Strength of non-executive directors: Non-executive directors should be not less than 50 percent of the total strength of the Board. Strength of independent directors: In case the board has a non-executive chairman, independent directions should be at least one-third of the total strength of the board. In case of an executive chairman, at least half the Board should comprise of independent Directors.
216 2. Audit Committee: The company shall constitute a qualified and independent audit committee of the Board subject to following conditions: The audit committee should have minimum three non-executive directors other than managing and whole time director. The majority of the non-executive directors should be independent and at least one of them should have financial and accounting knowledge. The committee shall meet at least thrice a year. 3) Remuneration of Directors: The company shall make the following disclosures on the remuneration of directors in the section on corporate governance in the annual report: full particulars of remuneration like salary, benefits, bonus, stock options, pension, etc., performance linked incentives along with the performance criteria and fixed component of incentives, particulars of service contracts, notice, period, severance fees, and stock option details like whether issue price is at a discount over market price, period of option etc. The Board shall decide the remuneration of non-executive directors. 4. Board Procedure: The Clause 49 of the listing agreement requires companies to ensure that the gap between two Board meetings shall not exceed 4 months. And it has been specified that a director shall not become a member in more than 10 committees nor a Director acts as a chairman of more than 5 committees.
217 5. Management: Every listed company shall include in its Directors' Annual report or separately, a Management Discussion and Analysis Report, which shall form part of the annual report to the shareholders. The Management Discussion and Analysis report should contain a discussion on the following aspects: industry structure and developments, opportunities and threats, segment-wise or product wise performance, outlook, internal control systems and their adequacy, discussion on financial performance with respect to operational performance, and material developments in Human Resource/ Industrial relations' front including number of people employed. 6. Shareholders: In the case of appointment of a new Director or reappointment of a Director, the shareholder must be given: a brief resume of the Director, * nature of the experience in specific functional area and names of companies in which he is director and in which he holds membership of committee. The company shall supply quarterly results and presentations made by it to stock exchanges to make them to put the information on their own websites. The company shall constitute a shareholders/investors Grievance Committee under the chairmanship of a non-executive Director specifically to look into complaints in respect of transfer of shares, nonreceipt of balance sheet, non-receipt of dividend, etc.
218 The company shall delegate the power of transfer to an officer or to a committee or to the Register and share transfer agents and the delegated authority shall attend to share transfer work once in a fortnight. 7. Report on Corporate Governance in the Directors' Report: Every listed company is requested to include in a separate section in the annual report, a detailed compliance report on corporate governance. Noncompliance of any item of clause 49 of listing agreement should be mentioned in the compliance report. 8. Certificate of Compliance: The company shall obtain a certificate from the auditors of the company regarding compliance of the conditions of the corporate governance as per clause 49 of the listing agreement and annex the same with the Directors Report. Copy of the certificate shall also be sent by the company to the stock exchanges concerned along with the annual report. Non-mandatory Requirements: Clause 49 of the listing agreement includes the non-mandatory requirement of corporate governance. They shall be implemented as per the direction of the company. But in the section on corporate governance the company should disclose whether any of the non-mandatory requirements has been adopted or not. All the companies seeking listing in stock exchanges for the first time are required to comply with the conditions of corporate governance immediately. The stock exchanges shall ensure that these provisions have been complied with before granting any new listing. For this purpose, it will be satisfactory compliance, if these companies have set up the Board and constituted the committees such as Audit Committee. Shareholders/Investor Grievance Committee etc. before seeking listing. A reasonable time to comply with these conditions may be granted only where the stock exchange is satisfied that the
219 genuine legal issue exists which will delay such compliance. In such cases, while granting listing, the stock exchanges shall obtain on undertaking from the company. In case the companies failing to comply with this requirement without any genuine reason, the application money shall be kept in an escrow account till the conditions are complies with. Part II Analysis of Compliance with Code of Corporate Governance: Corporate governance is the concept of beneficent and benevolent governance of companies. The companies should comply with the code of best corporate practices which inculcalate professional management, transparency and accountability. In the present study, though the sample units selected for study are central government public sector undertakings, shares of 4 PSUs (i.e. HMT, BEL, BEML, ITI) are listed with recognized stock exchanges. Therefore, the Stock Exchange Board of India made them compulsory to comply with the Clause 49 of listing agreement. None of the sample units has voluntarily disclosed report on corporate governance. The information relating to disclosure of corporate governance by the sample PSUs during study period is shown in Table 7.1. Table- 7.1 Analysis of Disclosure of the Report on Corporate Governance Sample units Accounting year ended HAL 0 0 0 0 0 HMT 0 1 1 1 1 BEL 0 0 0 1 1 BEML 0 0 1 1 1 ITI 0 0 1 1 1 Source: Annual Reports of sample units for the related years 0=> not disclosed 1=> Disclosed
220 A perusal of Table 7.1 shows that HAL has not disclosed report on corporate governance; while HMT has disclosed from 1999-00 to 2002-03. Similarly, BEL has not disclosed in the initial years of study i.e. from 1998-99 to 2000-01; while disclosed for later years of study i.e. for 2001-02 and 2002-03. And BEML and ITI has not disclosed for 1998-99 and 1999-00, while it is made available for shareholders for 3 years of study period i.e. from 2000-01 to 2002-03. Composition of Board of Directors: According to the Clause 49 of listing agreement, the strength of nonexecutive directors should not be less than 50 percent of the total strength of the Board. And in case of non-executive chairman, number of independent directors should be at least one-third of the board. If the board consists of executive chairman, it should have at least half of independent directors. In the present study, all sample PSUs have executive chairman and, therefore, number of independent directors should be half of the total strength. The information relating to the strength of the board, number of nonexecutive directors, and number of independent directors in each of the listed sample units, is shown in Table 7.2. Sample units Table-7.2 Analysis of Compliance with Composition of Board of Directors Accounting year ended T NED ID T NED ID T NED ID T NED ID T NED ID HMT NA NA NA 10 5 5 12 6 6 6 3 3 5 3 2 BEL NA NA NA NA NA NA NA NA NA 16 8 8 16 8 8 BEML NA NA NA NA NA NA 10 5 5 10 4 4 9 3 3 ITI NA NA NA NA NA NA 5 2 2 6 3 3 6 3 3 Source: Annual Reports of sample units for related years NA => Not Available T => Total Strength of the Board NED => Non-Executive Directors ID => Independent Directors
221 Table 7.2 depicts that, HMT ltd consists of 50 percent of non-executive and independent directors from 1999-00' to 2001-02; while more than SOpercent non-executive directors and less than 50 percent independent directors for the year 2002-03. Similarly, ITI consists less than 50percent for 2000-01; while 50 percent for 2001-02 and 2002-03. BEL consists of 50 percent of non-executive directors and independent directors for 2001-02 and 2002-03. But BEML consists of SOpercent of non-executive and independent directors for 2000-01 and less than 50percent for 2001-02 and 2002-03. Board Procedure: The clause 49 of the listing agreement requires that the gap between two board meetings shall not exceed four months. That indicates the company board should meet at least 4 times in a year. The information relating to the number of board meetings held during each of year study by the sample units is shown in Table 7.3. Table-7.3 Analysis of Compliance with Board Procedure Sample units Accounting year ended HMT NA 5 7 5 4 BEL NA NA NA 6 6 BEML NA NA 7 6 5 ITI NA NA 9 9 7 Source: Annual Reports of sample units for the related years of study NA=> Not Available A perusal of Table 7.3 reveals that, among 4 sample units, all have held not less than 4 board meetings during each year of study and also ensured that the gap between two board meetings is less than 4 months.
222 Audit Committee: There should be qualified and independent audit committee and it should have minimum three non-executive directors other than managing and wholetime director. And it should meet minimum three times in a year. The information relating to the composition of audit committee and number of audit committee meetings held by the sample PSUs during study period is shown in Table 7.4. Table-7.4 Analysis of Compliance with Audit Committee Sample units Accounting year ended D NED M D NED M D NED M D NED M D NED M HMT 0 NA NA 1 3 1 0 NA NA 1 3 0 1 3 0 BEL 0 NA NA 0 NA NA 0 NA NA 1 3 2 1 3 6 BEML 0 NA NA 0 NA NA 1 3 2 1 4 5 1 5 3 ITI 0 NA NA 0 NA NA 1 3 2 1 3 2 1 3 3 Source: Annual Reports of sample units for the related years of study D=> Disclosure of information about audit committee 0=> Not disclosed 1=> Disclosed NED => Non-executive directors M=>Audit Committee meetings held during the year NA=> Not Available A perusal of Table 7.4 shows that HMT Ltd has failed to disclose information about Audit Committee for 1998-99 and 2000-01. Similarly, BEL has disclosed for initial years of study i.e., from 1998-99 to 2000-01 and BEML and ITI has disclosed for 2000-01,2001-02 and 2002-03. In relation to number of non-executive directors in Audit Committee, it also reveals that the entire sample PSUs have fulfilled the minimum requirement of non-executive directors for constituting the Audit Committee. The Audit Committee of the Board of all 4 PSUs was constituted by minimum 3 nonexecutive directors for all years for which they have made disclosures.
223 It also reveals that, in case of HMT Ltd, the Audit Committee met only once during 1999-00 and did not meet during the year 2001-02 and 2002-03; while in case of BEL, it met two times in 2001-02 and six times during 2002-03. Similarly, BEML met two, five and three times during 2000-01, 2002-02 and 2002-03 respectively. In case of ITI, also, it met one, two and three times during 2000-01, 2001-02 and 2002-03 respectively. Remuneration Committee: All listed companies mus: have Remuneration Committee and each listed company should make disclosures on the remuneration of directors in the section on corporate governance in the annual report. In this case, all sample PSUs are Government companies and fixation of terms and conditions of appointment of directors are made by Government of India. As such, no remuneration committee has been constituted. The information relating to the disclosure of remuneration of directors by the sample PSUs during study period is shown in Table 7.5. Table-7.5 Analysis of Disclosure of Information about Directors Remuneration Sample units Accounting year ended HMT NA 0 0 1 1 BEL NA NA NA 1 1 BEML NA NA 0 1 1 ITI NA NA 0 0 0 Source: Annual Reports of sample units for the related years 0=> Not disclosed l=>disclosed NA=> Not Available
224 A perusal of Table7.5 reveals that HMT Ltd has disclosed information on remuneration of directors for 2001-02 and 2002-03; while not disclosed for 1998-99,1999-00 and 2000-01. Similarly, BEL and BEML has made disclosure for 2001-02 and 2002-03. But ITI has not made any disclosure on remuneration of directors for any of the study period. Shareholders' Grievance Committee: All listed companies should constitute a Shareholders/ Investors' Grievance Committee under the chairmanship of non-executive director specifically to look in to the complaints in respect of transfer of shares, nonreceipt of balance sheet, non-receipt of dividend etc. The information relating to the disclosure of information about shareholders grievance committee by the sample PSUs during study period is shown in Table 7.6. Table-7.6 Analysis of Disclosure of Information about Shareholders Grievance Committee Sample units Accounting year ended HMT NA 1 1 1 1 BEL NA NA NA 1 1 BEML NA NA 0 1 1 ITI NA NA 1 1 1 Source: Annual Reports of sample units for the related years 0=>not disclosed 1=> Disclosed NA=> Not Available
225 Table 7.6 shows that, HMT Ltd has made disclosure about shareholders' Grievance committee, viz., number of complains received, number of complaints solved and information about share transfers, etc., for 4 years of study i.e. and from 1999-00 to 2002-03. Similarly, BEL disclosed for two years i.e. 2001-02 and 2002-03. BEML and ITI have made disclosures for 3years i.e. from 2000-01 to 2002-03. Certificate of Compliance: Every listed company is required to obtain a certificate from the auditors of the company regarding compliance of the conditions of corporate governance as per clause 49 of the listing agreement and annex the same with the Directors Report. The information relating to the disclosure of information about certificate of compliance by the sample PSUs is shown in Table 7.7. Table-7.7 Analysis of Disclosure of Information about Certificate of Compliance Sample units Accounting year ended HMT NA 0 0 1 1 BEL NA NA NA 1 1 BEML NA NA 0 1 1 ITI NA NA 0 1 1 Source: Annual Reports of sample units for the related years 0=Not disclosed l=>disclosed NA=> Not Applicable A perusal of Table 7.7 shows that HMT Ltd has not disclosed compliance certificate for 1999-00 and 2000-01; while it disclosed for 2001-02 and 2002-03. Similarly, BEML and ITI have not disclosed compliance certificate for 2000-01; while they made disclosure for 2001-02 and 2002-03, and BEL has made disclosure for both the years i.e. 2001-02 and 2002-03.
226 Management Discussion and Analysis Report: Every listed company should include in its Directors' Report or separately, a Management Discussion and Analysis Report. It should contain information on aspects of the operation of the company. The Table 7.8 gives information about management discussion and analysis report. Table-7.8 Analysis of Disclosure of Information about Management Discussion and Analysis Report Sample units Accounting year ended HMT NA 0 0 1 1 BEL NA NA NA 1 1 BEML NA NA 0 1 1 ITI NA NA 0 1 1 Source: Annual Reports of sample units for the related years 0=Not disclosed l=>disclosed NA=> Not Applicable Table 7.8 reveals that, HMT Ltd has not made disclosure of management discussion and analysis report in the initial years i.e. form 1999-00 and 2000-01. But it has made disclosure for 2001-02 and 2002-03. Similarly, BEML and ITI have not made disclosure for the period 2000-01 and made disclosure for 2001-02 and 2002-03. But BEL has made disclosure for both the years i.e. for 2001-02 and 2002-03.
227 Areas Covered in Management Discussion and Analysis Reports: The Management Discussion and Analysis Report should contain a discussion on the following aspects of the operation of the company: industry structure and development, opportunities and threats, segment wise or product wise performance, outlook, risks and concerns, internal control systems and their adequacy, discussion on financial performance with respect to operational performance, and material developments in Human Resources/ industrial Relations including number of people employed. The information relating to the areas covered in Management Discussion and Analysis Report by the sample PSUs during study period is shown in Table 7.9. Table-7.9 Analysis of Disclosure of Information in Management Discussion and Analysis Report Items of disclosure Number of the sample PSUs that disclosed during accounting year ended Industry structure and developments. NA NA NA 4 4 Opportunities and threats NA NA NA 4 4 Segment wise or product wise performance NA NA NA 4 4 Outlook NA NA NA 4 4 Risks and concerns NA NA NA 4 4 Internal control systems and their adequacy NA NA NA 4 4 Discussion on financial performance with respect of operational performance Material development in Human Resources/ Industrial relations including no of people employed Source: Annual Reports of sample units for the related years NA=> Not Applicable NA NA NA 4 4 NA NA NA 4 4
228 A perusal of Table 7.9 depicts that all the sample PSUs under study have disclosed the information as required by the Clause 49 of the listing agreement in their management discussion and analysis report for two years of study i.e. 2001-02 and 2002-03. Non-mandatory Requirements: Clause 49 of listing agreement includes non-mandatory requirement of corporate governance. The company should disclose non-mandatory requirements adopted by it. But, in the study none of the PSUs has adopted non-mandatory requirements and, therefore, no disclosure is made in Corporate Governance Report by any sample unit during study period.