Committees on Corporate Governance¶
Cadbury Committiees¶
The Cadbury Committee Report, officially titled “Financial Aspects of Corporate Governance,” is a landmark document published in December 1992. It was issued by the Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury. The Cadbury Report was crucial in establishing foundational principles for modern corporate governance, and its recommendations for the structure and function of board committees have become a standard across many countries. Here’s an explanation of the three specific committees recommended by the Cadbury Report:
1. Audit Committee¶
The Audit Committee plays a critical role in enhancing the integrity and transparency of financial reporting. Cadbury recommended that this committee be composed mainly, or entirely, of non-executive directors, who should be independent of the management to ensure unbiased oversight. The main responsibilities of the Audit Committee include:
- Overseeing financial reporting: Ensuring the accuracy and completeness of the company’s financial statements.
- Monitoring internal controls: Reviewing the company’s internal financial controls and risk management systems.
- Liaising with auditors: Overseeing the relationship with the external auditors, including their appointment, remuneration, and the conduct of the audit. This also involves reviewing findings and following up on any issues identified during audits.
2. Remuneration Committee¶
The Remuneration Committee is tasked with setting the compensation for executive directors and senior management. This committee should also consist predominantly or entirely of non-executive directors to prevent any potential conflicts of interest that could result in excessively high payments to directors. Key functions include:
- Determining policy for executive remuneration: Establishing a formal and transparent procedure for developing policy on executive remuneration.
- Setting remuneration packages: Deciding specific remuneration packages for each of the executive directors, including pensions and any compensation payments. The aim is to ensure these are aligned with the business strategy and promote the long-term success of the company.
- Monitoring and reviewing: Regularly reviewing the outcomes of the remuneration policy to ensure it remains effective in attracting, retaining, and motivating executives.
3. Nomination Committee¶
The Nomination Committee is responsible for making recommendations to the board on all new board appointments and it is crucial for planning succession. Like the other committees, it should be composed largely or wholly of non-executive directors. Its responsibilities include:
- Evaluating the structure, size, and composition of the board: Ensuring the board has a balanced composition of skills, experience, independence, and knowledge of the company to enable it to discharge its duties and responsibilities effectively.
- Identifying and nominating candidates: Selecting candidates to fill board vacancies as and when they arise, based on objective criteria and with due regard for the benefits of diversity on the board, including gender.
- Succession planning: Regularly reviewing the leadership needs of the organization, both executive and non-executive, to ensure it can compete effectively in the marketplace.
Sarbanes-Oxley¶
The Sarbanes-Oxley (SOX) Act of 2002 is a significant legislative act passed in response to a series of corporate financial scandals that severely damaged investor trust. Here’s a breakdown of the principal areas of reform that SOX introduced:
1. Corporate Responsibility¶
SOX places a heavy emphasis on enhancing the accountability of corporate executives. It requires:
- CEO and CFO Certifications: The Act mandates that the CEO and CFO certify the accuracy of the financial statements, ensuring they are free of misleading statements and omissions and fairly present the financial condition and operations of the company.
- Internal Controls: Section 404 requires companies to establish, maintain, and report on robust internal controls for financial reporting. This includes an annual internal control report that must state the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
- Financial Disclosures: The Act enhances the disclosures required in the financial reports of corporations, including off-balance sheet transactions and other relationships with unconsolidated entities that may have a material current or future effect on the financial condition of the company.
2. Increased Criminal Punishment¶
To deter corporate and accounting fraud and to punish wrongdoers, SOX includes provisions for:
- Severe Penalties for Fraud: The Act significantly increases the penalties for securities fraud, including longer jail terms and larger fines for both individuals and corporations.
- Obstruction of Justice and Destruction of Evidence: It criminalizes the destruction or alteration of documents to obstruct any investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under the Bankruptcy Code.
## Kumar Mangalam Birla Committee (1999) The Kumar Mangalam Birla Committee was established by the Securities and Exchange Board of India (SEBI) to promote and raise the standards of corporate governance in India. This was a response to the variations in corporate governance practices among Indian companies and the evolving state of the capital markets. The committee's report was significant as it represented the first formal and comprehensive attempt to evolve a Code of Corporate Governance specifically for Indian conditions. Its recommendations led to the inclusion of Clause 49 in the Listing Agreement in 2000, which laid down various corporate governance practices that listed companies had to follow, such as the composition and roles of audit committees, board independence, and enhanced disclosure requirements.
Naresh Chandra Committee (2002)¶
Formed in the wake of high-profile corporate scandals like Enron and the subsequent implementation of the Sarbanes-Oxley Act in the U.S., the Naresh Chandra Committee was tasked with examining auditor-client relationships and the role of independent directors in India. The committee addressed crucial issues like the independence of auditors, the need for limiting non-audit services provided to audit clients to avoid conflicts of interest, and strengthening the role and effectiveness of independent directors.
N R. Narayana Murthy Committee (2003)¶
After analyzing compliance with Clause 49 by listed companies, SEBI identified a need to enhance the actual effectiveness of the corporate governance code. The N R. Narayana Murthy Committee was therefore appointed to review its implementation and to make necessary revisions. This committee recommended improvements such as the definition and role of independent directors, the importance of risk management, and the use of technology for better governance practices. It led to a revised Clause 49 that incorporated these recommendations, further strengthening governance standards.
Uday Kotak Committee (2017)¶
Recognizing ongoing issues and challenges in the landscape of corporate governance, the Uday Kotak Committee was convened by SEBI with a broad mandate to improve governance standards of listed companies in India. The committee focused on several key areas:
- Independence of Independent Directors: Ensuring not just the formality of independence but its spirit too, meaning that directors are genuinely able to make decisions independently of the company management.
- Related Party Transactions: Improving safeguards and disclosures around these transactions to prevent conflicts of interest and ensure fairness.
- Accounting and Auditing Practices: Addressing issues in these areas to enhance reliability and transparency of financial disclosures.
- Board Evaluation Practices: Making the evaluation process of boards and directors more robust and effective.
- General Meetings: Addressing issues faced by investors during these meetings to enhance their participation and decision-making power.
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