Tag: Financial Statements

Case Study: Volkswagen AG

Volkswagen AG is a German multinational automotive company that designs, manufactures, and distributes cars, trucks, and commercial vehicles. In 2015, the company became embroiled in a major scandal when it was revealed that Volkswagen had been cheating on emissions tests for its diesel engines. The scandal had significant implications for Volkswagen’s corporate governance, as well as its reputation and financial performance.

Corporate Governance Issues

The Volkswagen emissions scandal raised several corporate governance issues, including:

1. Board oversight: The Volkswagen board of directors had a responsibility to oversee the company’s operations and ensure that it was complying with relevant laws and regulations. However, it was revealed that the board had failed to adequately oversee the development and implementation of the diesel engines in question.
2. Executive leadership: The Volkswagen CEO at the time, Martin Winterkorn, was criticized for failing to take responsibility for the scandal and for not taking action to address the issue when it was first discovered. This raised questions about the effectiveness of the company’s executive leadership and their commitment to ethical behavior and responsible decision-making.
3. Risk management: The Volkswagen scandal highlighted weaknesses in the company’s risk management practices. The company had failed to adequately assess the risks associated with cheating on emissions tests, and had not developed adequate contingency plans to address the potential consequences of such actions.
4. Transparency and disclosure: The Volkswagen scandal raised questions about the company’s transparency and disclosure practices. It was revealed that Volkswagen had not been transparent about its emissions testing practices, and had not disclosed the potential risks associated with cheating on these tests to investors or regulators.

Corporate Governance Response

In response to the scandal, Volkswagen took several steps to improve its corporate governance practices, including:

1. Board changes: Volkswagen appointed a new board of directors, with greater representation from outside the company. The new board was tasked with overseeing the company’s operations and ensuring that it complied with relevant laws and regulations.
2. Executive changes: Volkswagen replaced its CEO and several other executives implicated in the scandal. The new leadership team was tasked with implementing changes to the company’s culture and practices to ensure that ethical behavior and responsible decision-making were prioritized.
3. Risk management improvements: Volkswagen implemented new risk management practices, including a more robust risk assessment process and improved contingency planning.
4. Transparency and disclosure improvements: Volkswagen committed to improving its transparency and disclosure practices, including more frequent and detailed reporting to investors and regulators.

Conclusion

The Volkswagen emissions scandal was a major corporate governance issue that had significant implications for the company’s reputation and financial performance. However, the company’s response to the scandal demonstrated a commitment to improving its corporate governance practices and addressing the issues that had led to the scandal. By implementing changes to its board, executive leadership, risk management practices, and transparency and disclosure practices, Volkswagen was able to begin rebuilding its reputation and regaining the trust of its stakeholders.

Case Study: Enron Corporation

Enron Corporation was an American energy, commodities, and services company that became embroiled in one of the largest corporate scandals in history. The company’s collapse in 2001 raised serious questions about corporate governance practices and the role of auditors in ensuring the integrity of financial statements.

Corporate Governance Issues

The Enron scandal raised several corporate governance issues, including:

1. Board oversight: The Enron board of directors was criticized for failing to provide effective oversight of the company’s operations, including the use of off-balance sheet transactions to conceal debt and inflate earnings.
2. Executive compensation: Enron executives, including CEO Jeffrey Skilling and CFO Andrew Fastow, were found to have received excessive compensation through the use of stock options and other incentives. This raised questions about the alignment of executive compensation with company performance, and the potential for conflicts of interest.
3. Auditing: Enron’s external auditor, Arthur Andersen, was found to have provided inadequate auditing services and to have colluded with Enron executives to cover up financial irregularities. This raised questions about the role of auditors in ensuring the integrity of financial statements and their independence from the companies they audit.

Corporate Governance Response

In response to the scandal, the US Congress passed the Sarbanes-Oxley Act in 2002, which introduced new requirements for corporate governance, including:

1. Board changes: The Sarbanes-Oxley Act required companies to have a majority of independent directors on their boards, and to establish audit, compensation, and nominating committees with independent members.
2. Executive changes: The Act introduced new requirements for executive compensation disclosure, and for CEOs and CFOs to certify the accuracy of financial statements. It also imposed penalties for fraud and increased the potential liability of executives for wrongdoing.
3. Auditing changes: The Act introduced new requirements for auditor independence, including prohibitions on certain non-audit services provided by auditors to their clients. It also established the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing profession and to enforce compliance with auditing standards.

Conclusion

The Enron scandal was a watershed moment for corporate governance and led to significant changes in the regulatory environment for public companies. The scandal highlighted the importance of effective board oversight, the need for alignment between executive compensation and company performance, and the critical role of auditors in ensuring the integrity of financial statements. The Sarbanes-Oxley Act introduced new requirements for corporate governance, including changes to board composition, executive compensation, and auditing practices. These changes helped to improve transparency, accountability, and trust in the US public markets, and set a new standard for corporate governance practices globally.

Case Study: Satyam Computer Services Ltd.

Satyam Computer Services Ltd. was an Indian IT company that became embroiled in a major corporate governance scandal in 2009. The scandal raised serious questions about corporate governance practices in India and the role of auditors in ensuring the integrity of financial statements.

Corporate Governance Issues

The Satyam scandal involved the falsification of financial statements, misappropriation of funds, and a lack of transparency in the company’s operations. The scandal raised several corporate governance issues, including:

1. Board oversight: The Satyam board of directors was criticized for failing to provide effective oversight of the company’s operations, including the approval of related-party transactions and the appointment of key executives. The board was accused of being too closely aligned with the company’s founder and not independent enough to challenge his decisions.
2. Auditing: Satyam’s external auditor, PriceWaterhouseCoopers (PwC), was found to have provided inadequate auditing services and to have colluded with Satyam executives to cover up financial irregularities. This raised questions about the role of auditors in ensuring the integrity of financial statements and their independence from the companies they audit.
3. Related-party transactions: Satyam was accused of engaging in related-party transactions that were not in the best interests of the company and its shareholders. This raised questions about the transparency and fairness of such transactions, and the potential for conflicts of interest.

Corporate Governance Response

In response to the scandal, the Indian government introduced new requirements for corporate governance, including:

1. Board changes: The Securities and Exchange Board of India (SEBI) introduced new regulations for the composition and functioning of boards of listed companies. The regulations required a majority of independent directors on boards, and established audit, nomination, and remuneration committees with independent members.
2. Auditing changes: The Institute of Chartered Accountants of India (ICAI) introduced new auditing standards and guidelines to improve the quality of audits and the independence of auditors. The ICAI also introduced new disciplinary procedures to hold auditors accountable for professional misconduct.
3. Investor protection: SEBI introduced new regulations to protect the interests of minority shareholders and to improve transparency and disclosure in corporate governance practices.

Conclusion

The Satyam scandal was a wake-up call for corporate governance practices in India and led to significant changes in the regulatory environment for listed companies. The scandal highlighted the importance of effective board oversight, the need for transparency and fairness in related-party transactions, and the critical role of auditors in ensuring the integrity of financial statements. The regulatory changes introduced by SEBI and ICAI helped to improve transparency, accountability, and trust in Indian public markets, and set a new standard for corporate governance practices in the country.

Some evidence demonstrates that governance codes can be viewed as mechanisms facilitating governance convergence across countries. Such convergence is the result of several external forces among which the most powerful are globalization, market liberalization and influential foreign investors. Namely, globalization, the internalization of markets and deregulation has led to rapid changes in traditionally grounded models of corporate governance. These external forces ‘lead to pressure on national governments, institutions and companies, to conform to internationally accepted best practices of corporate governance at the international level’, thereby influencing the attractiveness of countries and companies for foreign investors. Countries that are more exposed to other national economic systems experience greater pressure to change governance practice not only to improve efficiency of domestic companies but also ‘to harmonize the national corporate governance system with international best practices’.

Transparency

A principle of good governance is that stakeholders should be informed about the company’s activities regarding its plans in the future and any risks involved in its business strategies.

Transparency means openness by the company willing to provide clear information to shareholders and other stakeholders. For example, it refers to the openness to disclose financial performance figures which are truthful and accurate.

Disclosing materials concerning the organization’s performances and activities should be will timed and accurate to ensure that all investors have access to clear, factual information which reflects the financial, social and environmental position of the organization. A company should clarify the roles and responsibilities of the board and management to provide a level of accountability.

Transparency ensures that stakeholders can have confidence in the decision-making and management processes of a company.

Accountability

Corporate accountability refers to the obligation and responsibility to provide an explanation or reason for the company’s actions and conduct such as:

• The board should present a balanced and understandable assessment of the company’s position and prospects.
• The board is responsible for determining the nature and extent of the significant risks the company is willing to take.
• The board should maintain sound risk management and internal control systems.
• The board should establish formal and transparent arrangements for corporate reporting and risk management and for maintaining an appropriate relationship with the company’s auditors.

The board should communicate with stakeholders at regular intervals giving a fair, balanced and explicit analysis of how the company is achieving its business purpose.

Responsibility

The Board of Directors are given authority to act on behalf of the company. They should therefore accept full responsibility for the powers that it is given and the authority that it exercises. The Board of Directors are responsible for overseeing the management of the business, affairs of the company, appointing the chief executive and monitoring the performance of the company. In doing so, it is required to act in the best interests of the company.

Accountability goes hand in hand with responsibility. The Board of Directors should be made accountable to the stakeholders for the way in which the company has carried out its responsibilities.

Eight Codes of Corporate Governance

Governance Structure:

All organizations should be headed by an effective board and all the responsibilities and accountabilities within the organisation should be clearly distinguished.

Structure of the Board and its Committees:

The board should consist of appropriate combination of executive directors, independent directors and non-independent non-executive directors to prevent one individual or a small group of individuals from dominating the board’s decision. The board’s size and scale should be in proportion with the level of diversity of the organisation. Appropriate board committees may be formed to assist the board in effective performances to fulfil the duties.

Director’s Appointment Procedure:

There should be a formal, rigorous and transparent process for various activities like appointments, election, re-election of directors etc. Members for the board should be appointment on merit basis fulfilling objective criteria which should include skills, knowledge, experience, and independence for the benefits of the company. The board should ensure that a formal, rigorous and transparent procedure be in place for planning the succession of all key officeholders.

Directors’ duties, remuneration and performance:

Directors should be aware of their legal duties. They must observe and foster high ethical standards and a strong ethical culture in their organisation. Each director must be able to give sufficient time to discharge his or her duties effectively. Conflicts of interest should be disclosed and managed.

The board of members is responsible for the governance of the organisation’s information, information technology and information security. The board, committees and individual directors should be supplied with informations in a timely manner and in an appropriate form and quality. The performances of board members should be evaluated and be held accountable to appropriate stakeholders. The board should be transparent, fair and consistent in determining the remuneration policy for directors and senior executives.

Risk Governance and Internal Control:

The board will be held responsible for risk governance. It must check the development and execution of a comprehensive and powerful system of risk management and also ensures the maintenance of a sound internal control system.

Reporting with Integrity:

The board must present a fair, balanced and understandable assessment of the performances and outlook of organization’s financial, environmental, social and governance position in its annual report and on its website.

Audit:

All the organizations should consider having an effective and independent internal audit function that has the respect, confidence and cooperation of both the board and the management. The board should establish formal and transparent arrangements to appoint organisation’s auditors and maintain an appropriate relationship with them.

Relations with Shareholders and other key Stakeholders:

The board should be responsible for ensuring that an appropriate interchange and disclosure takes place between the organisation, its shareholders and other key stakeholders. The board should respect the interests of its shareholders and other key stakeholders within the context of its fundamental purpose.

Five Pillars of Good Corporate Governance Make Up the Corporate Governance Code

Much like the pillars of good corporate governance in the United States, the Corporate Governance Code in the United Kingdom comprises the pillars of leadership, effectiveness, accountability, remuneration and shareholder relationships.

Leadership

The code requires companies to ensure to shareholders that they have an effective board of directors that’s capable of providing excellence in board leadership. Boards of directors are collectively responsible for the short- and long-term success of the corporations they serve.

Strong leadership requires corporations to have a clear division of the responsibilities between board directors and executives. Boards are responsible for strategic planning and oversight, and the executives are responsible for the day-to-day responsibilities of running the company. The board chair is responsible for the board’s leadership and the chair must ensure that the board operates as efficiently as possible in relation to all of their board duties and responsibilities.

Non-executive board directors should constructively challenge the board and help to develop successful proposals for strategy. The code expressly states that no single person should have total decision-making power on a board.

Effectiveness

The code requires corporate boards to ensure that they have a composition that encompasses the appropriate balance of skills, experience, independence and knowledge of the company so that they’re able to perform their duties and responsibilities effectively:

• Boards are required to develop a formal, rigorous and transparent process for appointing new board directors.
• Before accepting a position on a board of directors, nominees should ensure that they have sufficient time to fulfill their board duties and responsibilities.
• Boards should avail their board directors of a comprehensive board orientation and onboarding process. In addition, boards should provide regular opportunities for board director training and education.
• Management should provide accurate information to the board that has the appropriate form and quality so that the board can fulfill its duties in a timely manner.
• Boards should also conduct rigorous annual self-evaluations for the board, individual directors and significant committees, with the goal of improving their performance. All board directors should be subject to regular elections as long as they continue to perform satisfactorily.

Accountability

The board is wholly accountable for the actions and decisions of the company. The board should make annual disclosures to shareholders that represent a fair, accurate and comprehensive assessment of the corporation’s positions and corporate outlook.

The board is additionally responsible for assessing the nature and extent of risks it is willing to take to achieve its strategic plans. Boards should participate in sound risk management and internal control systems.

Boards should also establish formal procedures for corporate reporting, risk management reporting and internal control principles. Procedures should include details of relationships between the company and the internal and external auditors.

Remuneration

The United Kingdom favors remuneration packages that are designed to promote the long-term success of the company and that are directly aligned with performance. Remuneration should sufficiently challenge executives, be transparent and be rigorously applied.

The company should have a formal, transparent process for developing remuneration policies and setting remuneration packages. Directors shouldn’t be involved in setting their own pay.

Shareholder Relationships

Boards should utilize their annual general meetings to communicate and engage with investors on their objectives and strategic planning. The board should ensure that communications with shareholders are satisfactory.

These pillars are considered the minimum for the basics of good governance. Corporations are encouraged to add their own best practices as they develop them and learn from other corporations around the world.

While it is essential for directors to have an indication as to the level of commitment required of them, it is impossible to state with certainty how many man hours would be required of them at the time of taking on such commitments. The level of commitment required of a Director would vary from one company to the other but the average time commitment by global standards is that a Director should be prepared to spend at least four (4) days every quarter of the financial year on the company’s business after the induction phase. This includes time required to prepare for and attend scheduled Board meetings, Annual Board strategy away-day(s), the Annual General Meeting, site visits, committee meetings, meetings with shareholders, trainings and sessions as part of the Board evaluation process. There is always a likelihood of additional time commitment in respect of preparation time and ad hoc matters which may arise from time to time, and particularly when the Company is undergoing a period of increased activity.

In addition to the time commitment, particularly with respect to preparation for and attendance at Board meetings, a Director is required to actively participate at such meetings by bringing his independent judgment, objectivity as well as his expertise and experience to bear on Board deliberations. To be able to participate actively, a Non-Executive Director particularly, who is not involved in the day to day running of the company, will need to spend sufficient time studying Board papers to have a good understanding of the agenda items and be able to ask the right questions and make informed contributions at Board meetings. To facilitate this, it is imperative that Board papers are circulated in good time and in appropriate format. It is good practice to provide executive summaries with respect to lengthy reports and presentations and provide appropriate references and supporting documents. Board papers should also be made available electronically to allow for on-the-go access.

The Chairman of the Board has a key role to play in encouraging Directors’ attendance and participation at Board meetings by ensuring that all the Directors receive accurate, timely and clear information. A proficient and experienced Chairman is able to ensure that Board meetings are properly conducted in a cohesive manner, is able to effectively stimulate participation from all Directors and keep in check a potentially dominant Director. The Chairman is responsible for ensuring that the Board is an effective working group by promoting a culture of openness and debate which encourages Directors with dissenting views to air such views.

To Increase Attendance and/or Participation in Committees

• Ensure committee chairs understand and can convey the role of the committee to members, and that the chair and members have up-to-date job descriptions.
• Ensure adequate orientation that describes the organization and its unique services, and how the committee contributes to this mission.
• Remember that the organization and its committees deserve strong attendance and participation. Don’t fall prey to the perspective that “we’re lucky just get anyone.” Set a standard for the best.
• Have ground rules that support participation and attendance. Revisit the ground rules every other meeting and post them on the bottom of agendas.
• Let go of “dead wood.” It often help to decrease the number of committee members rather than increase them.
• Consider using subcommittees to increase individual responsibilities and focus on goals.
• Conduct yearly committee evaluations that includes a clear evaluation process and where each committee member evaluates the other members, and each member receives a written report about their strengths and how they can improve their contributions.
• Attempt to provide individual assignments to the committee members.
• Have at least one staff member participate in each committee to help with administrative support and providing information.
• Monitor quorum requirements for the entire board (as set forth usually in ByLaws), or the minimum number of board members who must be present for the board to officially enact business. This quorum, when not met, will serve as a clear indicator, or signal, that the board is in trouble.
• Develop a committee attendance policy that specifies the number of times a member can be absent in consecutive meetings and in total meetings per time period.
• Generate minutes for each committee meeting to get closure on items and help members comprehend the progress made by the committee.
• In committee meeting reports, include noting who is present and who is absent.
• Consider having low-attendance members involved in some other form of service to the organization, e.g., a “friends of the organization,” or something like that, who attends to special events rather than ongoing activities.
• Have a “summit meeting” with committee members to discuss the low attendance problem, and use a round-table approach so each person must speak up with their opinions.

MCA has permitted use of video conference facility for Board / Committee meetings subject to following conditions:

1. The facility shall be capable of allowing all participants to communicate concurrently with each other without any intermediary; Every director must attend at least one Board / Committee meeting personally in each financial year;
2. Notice of Meeting should provide for the availability of the facility and necessary information to access the same;
3. The Notice should seek confirmation of director that he would participate through video conference; in the absence of confirmation, it is to be presumed that he would physically participate;
4. Chairman and Secretary are responsible for integrity, proper functioning of the meeting and ensure participation by director himself / authorized person;
5. Roll call should be taken of directors participating physically a well as through video conference at the commencement and at conclusion of meeting;
6. Participation by Director through video conference would be counted for the purpose of quorum;
7. At the end of meeting the chairman to read out summary of decisions taken against each agenda and details of voting by each director; That part of proceedings shall be recorded and preserved;
8. In minutes the Chairman shall record the presence of director during last three meetings whether personally or through conference; The Place where Chairman and Secretary are present shall be the place of Board Meeting.
9. Soft copy of the ‘Draft minutes’ to be circulated within 7 days of the meeting;
10. This facility is purely optional.

The board can appoint committees based on its objectives for the year, and these committees can help review and advise on the achievement of those objectives. The committee structure should be reviewed regularly to make sure there are no overlapping responsibilities.

There can also be standing committees, which operate on a more permanent basis, and ad-hoc committees, which are in place for a particular time frame and can then be disbanded once an objective has been achieved. Ad-hoc committees could also be termed task forces. Committee chairs can provide leadership to the committee and help translate the board’s goals into an agenda for committee meetings.

The board can accomplish much of the work through committees, which is an effective way to delegate work. They can focus specifically on areas such as governance, internal affairs, or external affairs.

Committee size will depend on the board’s needs, and it is helpful to recognise that the more committees you set up, the more meetings will need to take place.

Committee members should be selected based on their experience and skills. Each board member should serve on at least one committee, but preferably no more than two.

Essentially, a committee provides expert advice and counselling to the board. However, the committee’s suggestions still need to be approved by the board, and they are not obligated to go with this advice.

Remuneration Committee

The role of a Remuneration Committee is:

• To decide and approve the terms and conditions for appointment of executive directors and/ or whole time Directors and Remuneration payable to other Directors and matters related thereto.
• To recommend to the Board, the remuneration packages of the Company’s Managing/Joint Managing/ Deputy Managing/Whole time / Executive Directors, including all elements of remuneration package (i.e. salary, benefits, bonuses, perquisites, commission, incentives, stock options, pension, retirement benefits, details of fixed component and performance linked incentives along with the performance criteria, service contracts, notice period, severance fees etc.);
• To be authorized at its duly constituted meeting to determine on behalf of the Board of Directors and on behalf of the shareholders with agreed terms of reference, the Company’s policy on specific remuneration packages for Company’s Managing/Joint Managing/ Deputy Managing/ Whole-time/ Executive Directors, including pension rights and any compensation payment;
• To implement, supervise and administer any share or stock option scheme of the Company.
• to review the overall compensation policy, service agreements and other employment conditions to Executive Directors and senior executives just below the Board of Directors and make appropriate recommendations to the Board of Directors;
• to review the overall compensation policy for Non-Executive Directors and Independent Directors and make appropriate recommendations to the Board of Directors;
• to make recommendations to the Board of Directors on the increments in the remuneration of the Directors;
• to assist the Board in developing and evaluating potential candidates for senior executive positions and to oversee the development of executive succession plans;
• to review and approve on annual basis the corporate goals and objectives with respect to compensation for the senior executives and make appropriate recommendations to the Board of Directors;
• to review and make appropriate recommendations to the Board of Directors on an annual basis the evaluation process and compensation structure for our Company’s officers just below the level of the Board of Directors;
• to provide oversight of the management’s decisions concerning the performance and compensation of other officers of our Company;

Shareholders’ Grievance Committee

In terms of Clause 49-IV(G)(iii) of the Listing Agreement, a board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This committee shall be designated as “Shareholders/ Investors Grievance Committee”.

• Efficient transfer of shares; including review of cases for refusal of transfer transmission of shares and debentures;
• Redressal of shareholder and investor complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc;
• Issue of duplicate / split / consolidated share certificates;
• Allotment and listing of shares;
• Review of cases for refusal of transfer / transmission of shares and debentures;
• Reference to statutory and regulatory authorities regarding investor grievances; and to otherwise ensure proper and timely attendance and redressal of investor queries and grievances.”

Other committees

Risk Committee

The committee comprises a minimum of three independent non-executive directors, as well as the chief executive and financial director. The chair of the board may not serve as chair of this committee. Members of the committee are individuals with risk management skills and experience. The committee’s responsibilities include:

• Review and approve for recommendation to the board a risk management policy and plan developed by management. The risk policy and plan are reviewed annually.
• Monitor implementation of the risk policy and plan, ensuring an appropriate enterprise- wide risk management system is in place with adequate and effective processes that include strategy, ethics, operations, reporting, compliance, IT and sustainability.
• Make recommendations to the board on risk indicators, levels of risk tolerance and appetite.
• Monitor that risks are reviewed by management, and that management’s responses to identified risks are within board-approved levels of risk tolerance.
• Ensure risk management assessments are performed regularly by management.
• Issue a formal opinion to the board on the effectiveness of the system and process of risk management.
• Review reporting on risk management that is to be included in the integrated annual report.
• Review annually the charters of the group’s significant subsidiary companies’ risk committees, and their annual assessment of compliance with these charters to establish if the Naspers committee can rely on the work of these risk committees.
• Perform an annual self-assessment of the effectiveness of the committee, reporting these indings to the board.

Nomination Committee

The primary role of the Nomination Committee of the board is to assist the board by identifying prospective directors and make recommendations on appointments to the board and the senior most level of executive management below the board. The committee also clears succession plans for these levels. The Nomination Committee is responsible for making recommendations on board appointments and on maintaining a balance of skills and experience on the board and its committees.

Succession planning for the board is a matter which is devolved primarily to the Nomination Committee, although the committee’s deliberations are reported to and debated by the full board. The board itself also regularly reviews more general succession planning for the senior management of the group.

Corporate Governance Committee

Together with the audit and compensation committees, the nominating/corporate governance committee rounds out the three standing committees of a public company’s board of directors. It plays a critical role in overseeing matters of corporate governance for the board, including formulating and recommending governance principles and policies. As its name implies, this committee is charged with enhancing the quality of nominees to the board and ensuring the integrity of the nominating process. Given the recent focus on board composition and diversity, director elections, and proxy access, the role of nominating/corporate governance committee is in the spotlight.

Corporate Compliance Committee

The primary Objective of the Compliance Committee is to review, oversee and monitor:

• The company’s compliance with applicable legal and regulatory requirements.
• The company’s policies, programs, and procedures to ensure compliance with relevant laws, the company’s code of conduct, and other relevant standards
• The company’s efforts to implement legal obligations arising from settlement agreements and other similar documents
• Perform any other duties as are directed by the board of directors of the company.

An annual report is a document that public corporations must provide annually to shareholders that describes their operations and financial conditions. The front part of the report often contains an impressive combination of graphics, photos, and an accompanying narrative, all of which chronicle the company’s activities over the past year and may also make forecasts about the future of the company. The back part of the report contains detailed financial and operational information.

Annual reports became a regulatory requirement for public companies following the stock market crash of 1929 when lawmakers mandated standardized corporate financial reporting.

The intent of the required annual report is to provide public disclosure of a company’s operating and financial activities over the past year. The report is typically issued to shareholders and other stakeholders who use it to evaluate the firm’s financial performance and to make investment decisions.

Typically, an annual report will contain the following sections:

• General corporate information
• Operating and financial highlights
• Letter to the shareholders from the CEO
• Narrative text, graphics, and photos
• Management’s discussion and analysis (MD&A)
• Financial statements, including the balance sheet, income statement, and cash flow statement
• Notes to the financial statements
• Auditor’s report
• Summary of financial data
• Accounting policies

State of Company’s Affairs [Section 134(3)(i)]:

Board briefing about the Company business operation ,highlights, growth, services of the Company, operating profits, performance growths, overview of the business, new projects introduced during the year or any new services undertaken by the company.

Details of status of acquisition, mergers, expansion, modernization and diversification, and key business developments.

Besides, it points out the problems faced by the company which has affected the Profits and measures that have been taken to improve the working and reduces the costs.

Dividends [Section 134(3)(k):

The amount of Dividend if any, recommended by the board should be paid by way of Dividend, as to the rate under review for the approval of members at the  Annual General Meeting AGM

Details of Subsidiary, Joint Venture and Associate Companies (Rule 8(5)(iv):

Details of company that is ceased to its subsidiaries, Joint Venture or associate company.

Particulars of Loan and Investments Section 134(3)(g):

Disclosure of all particulars of Loans, guarantees or investments under Section 186.

Change in nature of Business, if any:

Details pertaining to change of business of the Company or in the subsidiaries business or in the nature of business carried on by them.

Amounts Transferred to reserves, if any:

The board shall states the amount which it proposes to any reserve in the Balance Sheet like debenture redemption reserve in terms of Section 71(13)etc.

Changes in share Capital, if any:

Change in total Share capital of the company and any increase during the year under review, pursuant to allotment of equity/preference shares /Right issue/ Private Placement/ preferential allotment/ Employee Stock Option scheme of the Company. 10. Web Link of annual return Section 134(3)(a): Web address link where annual return of company shall be published.

Number of Board Meeting Section 134(3)(b):

The number of Board Meetings held during the year and Committee meeting and details of Board meetings attended by each of the Director should be mentioned.

Particulars of Contract and Arrangement with Related Parties Section 188:

Details of all transactions entered along with the justification for entering into such a contract and arrangement by the company during the financial year. 13. Statutory Auditors:

Details about the statutory auditors of the company, any change made during the year, whether existing auditor(s) is/are eligible for reappointment etc. Compliance certificate from either the auditor(s) or practicing company secretaries regarding compliance of conditions of corporate governance shall be annexed with the director’s report.(Para C of Schedule V of Listing Regulations).

Explanation to Auditor’s Remarks Section 134(3)(f): Explanation or comment by the board on every qualification reservation, adverse or disclaimer made by the statutory auditor in his report and /or by the secretarial auditor in the Secretarial Audit Report.

Material changes affecting the Financial position of the company Section 134(3)(l):

Details of any material changes / events, if any occurring after balance sheet date till the date of report to be stated.

Conservation of energy, technology, absorption, foreign exchange earnings and outgo section 134(3)(m):

The board report shall contain the following details:

Conservation of energy:

Impact on the conservation of energy, Company utilization of alternative source, the capital investment on energy conservation types of equipment.

Technology absorption:

Research and development expenditure, Advantages of product improvement, cost reduction, product development or impact substitution.

Foreign Exchange earnings and outgo:

Terms of actual inflows during the year and the Foreign exchange outgo during the year in terms of actual outflows.

Risk Management Policy Section 134(3)(n):

Details of the development and implementation of the risk management policy of the company.

Details of Directors and Key Managerial Personnel Rule 8(5)(iii):

Details of Directors and KMP appointed or resigned during the year.

King III recommends that the delegation of powers to a committee be made official, in order for the members to have formal terms of reference to determine the scope of their powers, and the responsibilities they bear. The terms of reference should include detail pertaining to:

• The composition of the committee
• The objectives, purpose and activities
• The powers that have been delegated
• Any mandate to make recommendations to the board
• The lifespan of the committee, and
• How the committee reports to the board.

The Act requires public companies and state owned companies to appoint an audit committee comprising three independent non-executive directors. King III proposes that all other companies provide for the appointment of an audit committee (the composition, purpose and duties to be set out in the company’s Memorandum of Incorporation).

In addition, King III proposes that the board should appoint the audit, risk, remuneration and nomination committees as standing committees. The board may also consider establishing governance, IT steering and sustainability committees.

King III suggests that the committee should only comprise members of the board. The majority of the members should be non-executive, of which the majority should be independent. The ideal situation is for the chairperson of the board to also chair the nomination committee, failing which an independent non-executive director should be the chairperson.

The chairman of the committee should be an independent, non-executive director. The chair of the board should not chair the remuneration committee, but may be a member.

Insiders as Independent Directors

• Position: Current and former executives and directors of an issuer should not be permitted to sit as an independent non-executive directors until five years after leaving the relevant positions, and then only under certain restrictions.
• Rationale: Insiders such as individuals from these groups can retain emotional, financial, professional, and personal ties to the issuer, its management, and its directors. This retained loyalty may compel the insider to decide on matters in a way that does not first serve the interests of shareowners.

Independent Director’s Connection to the Company

• Position: Independent non-executive directors should not have been connected to a director, chief executive, or substantial shareowner of the issuer within the preceding five years.
• Rationale: Individuals with such links to insiders are more likely to make decisions on the basis of those links than on what is best for shareowners. After five years, the allegiance may diminish to a point where the independent, non-executive director may make decisions that run counter to the interests of the insider.

Mode of Appointment of Independent Directors

The appointment of independent directors should be made by the company from amongst persons, who in the opinion of the company, are persons with integrity, possessing relevant expertise and experience and who satisfy the above criteria for independence.

‘Material’ Transactions

The term material pecuniary relationship should also be clearly defined for the purpose of determining whether the director is independent or not. The concept of “Materiality’ is relevant from the recipient’s point of view and not from that of the company. The term ‘material’ needs to be defined in terms of percentage. In view of the Committee, 10% or more of recipient’s consolidated gross revenue / receipts for the preceding year should form a material condition affecting independence. For determining materiality of pecuniary relationship, transactions with an entity in which the director or his relatives hold more than 2% shareholding, should also be considered. An independent director should make a self-declaration in format prescribed to the Board that he satisfies the legal conditions for being an independent director. Such declaration should be given at the time of appointment of the independent director and at the time of change in status. Board should disclose in the Director’s Report that independent directors have given self-declaration and that also in the judgment of the Board they are independent. The Board should also disclose the basis for determination that a particular relationship is not material.

Director/ Attributes of Independent Directors

The Committee was of the view that definition of an Independent Director should be provided in law. The expression ‘independent director’ should mean a non-executive director of the company who:

a) Apart from receiving director’s remuneration, does not have, and none of his relatives or firms/companies controlled by him have, any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associate companies which may affect independence of the director. For this purpose “control” should be defined in law.

b) is not, and none of his relatives is, related to promoters or persons occupying management positions at the board level or at one level below the board;

c) is not affiliated to any non-profit organization that receives significant funding from the company, its promoters, its directors, its senior management or its holding or subsidiary company;

d) has not been, and none of his relatives has been, employee of the company in the immediately preceding year;

e) is not, and none of his relatives is, a partner or part of senior management (or has not been a partner or part of senior management) during the preceding one year, of any of the following:

i] The statutory audit firm or the internal audit firm that is associated with the company, its holding and subsidiary companies;

ii) The legal firm(s) and consulting firm(s) that have a material association with the company, its holding and subsidiary companies;

f) is not, and none of his relatives is, a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; g) is not, and none of his relatives is, a substantial shareholder of the company i.e. owning two percent or more of voting power.

Explanation: For the above purposes:

(i) “Affiliate” should mean a promoter, director or employee of the non-profit organization.

(ii) “Relative” should mean the husband, the wife, brother or sister or one immediate lineal ascendant and all lineal descendents of that individual whether by blood, marriage or adoption.

(iii) “Senior management” should mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.

(iv) “Significant Funding” Should mean 25% or more of funding of the Non Profit Organization.

(v) “Associate Company” Associate shall mean a company which is an “associate” as defined in Accounting Standard (AS) 23, “Accounting for Investments in Associates in Consolidated Financial Statements”, issued by the Institute of Chartered Accountants of India.