Tag: Shareholders Rights

Managing Director (MD) is a key managerial position in a company, responsible for overseeing the day-to-day operations and ensuring the company’s goals and strategies are effectively implemented. The Companies Act, 2013 governs the appointment, qualifications, and duties of a managing director, highlighting their critical role in corporate governance.

Appointment of Managing Director:

The appointment of a Managing Director is a formal process that involves both the board of directors and shareholder approval.

• Appointment by the Board of Directors:

Managing Director can be appointed by a resolution passed at the board meeting. However, the appointment must also comply with the company’s articles of association and any shareholder agreements, as these may contain specific rules on appointing key management personnel.

• Shareholders’ Approval:

The appointment of a managing director must be approved by the shareholders in a general meeting if required by the company’s articles or if the appointment is for a public company. A managing director’s appointment can initially be made by the board, but it must be confirmed by the shareholders within the prescribed time, typically within the next general meeting.

• Tenure of Appointment:

Managing Director’s term typically cannot exceed five years at a time, although they can be reappointed for additional terms, subject to the board and shareholder approval.

• Compliance with SEBI Regulations:

In the case of listed companies, any appointment of key managerial personnel, including the managing director, must also comply with Securities and Exchange Board of India (SEBI) regulations, especially regarding corporate governance.

• Eligibility for Appointment:

An individual can serve as a managing director in no more than two companies simultaneously. Further, one of these companies must not be a public company.

Qualifications of Managing Director;

The Companies Act, 2013, does not prescribe specific educational or professional qualifications for the role of managing director.

• Minimum Age Requirement:

Managing Director must be at least 21 years old, but no older than 70 years. If the individual is over 70, special resolution and justification by the board are required to appoint them.

• Legal Eligibility:

To be eligible for appointment as a managing director, the individual must not have been convicted of any offense, including those involving moral turpitude, fraud, or financial misdeeds. They must also not have been declared insolvent or of unsound mind.

• Professional Expertise:

Although the Act does not mandate specific qualifications, companies typically appoint individuals with significant experience in leadership, business management, finance, or relevant industry-specific knowledge to the role of managing director. Their professional background should demonstrate the ability to oversee company operations effectively.

• Non-disqualification under Section 164:

The individual must not be disqualified under Section 164 of the Companies Act, 2013. This section disqualifies anyone who has failed to file financial statements, returns, or has been involved in fraudulent activities, among other issues.

Duties of Managing Director

Managing Director is entrusted with significant responsibilities for the management and administration of the company. Their duties are not only to the board and shareholders but also to the company’s overall welfare, including employees, stakeholders, and regulatory authorities.

• Day-to-Day Operations:

The primary duty of the managing director is to oversee and manage the company’s daily operations. This includes ensuring that the business runs efficiently, achieving financial and operational targets, and aligning with the company’s strategic goals.

• Corporate Strategy and Leadership:

Managing Director plays a critical role in formulating and implementing corporate strategies. They work closely with the board of directors to design long-term plans, set key performance indicators (KPIs), and lead the company toward achieving its strategic objectives.

• Compliance with Laws and Regulations:

Managing Director must ensure that the company complies with applicable laws, including labor laws, corporate governance standards, and financial reporting obligations. They must also ensure compliance with the Companies Act, SEBI Regulations, and other industry-specific laws.

• Financial Oversight and Reporting:

One of the essential duties of a managing director is to oversee the company’s financial performance. They are responsible for ensuring that accurate financial records are maintained and that financial statements are prepared in compliance with statutory requirements. They must also ensure that the company’s taxes and regulatory filings are up to date.

• Representing the Company:

Managing Director often represents the company in meetings with external stakeholders, such as investors, regulators, business partners, and the media. They must articulate the company’s vision, financial performance, and market strategy while fostering strong relationships with these stakeholders.

• Corporate Governance:

As a key member of the leadership team, the managing director is expected to ensure strong corporate governance practices. This includes maintaining the highest standards of ethical behavior, ensuring transparency in decision-making, and protecting the interests of shareholders and stakeholders.

• Employee Management and Leadership:

Managing Director has a duty to manage senior executives and ensure the smooth functioning of the company’s workforce. They are often responsible for setting corporate culture, resolving disputes, and driving employee engagement and productivity.

• Accountability to the Board:

Managing Director must regularly report to the board of directors about the company’s performance, challenges, and strategic opportunities. They must also provide recommendations for improving performance and ensuring that the company stays aligned with its long-term goals.

• Crisis Management:

In times of crisis, the managing director must act swiftly and responsibly. Whether the crisis is financial, operational, or reputational, the managing director is responsible for leading the response and recovery efforts.

Directors play a pivotal role in the management and governance of companies, and with this authority comes certain responsibilities and liabilities. The Companies Act, 2013 outlines the legal framework governing the conduct of directors, ensuring accountability in their actions. Directors can be held liable for various types of breaches, including non-compliance with statutory duties, mismanagement, and misconduct.

Types of Liabilities

Directors’ liabilities can be categorized into several key types, including:

1. Civil Liability:

Civil liability generally arises when directors act in breach of their duties, leading to losses for the company or its stakeholders. Civil liability may result in the obligation to pay damages, compensation, or restitution. Examples are:

• Breach of fiduciary duty:

Directors are expected to act in the best interests of the company and its shareholders. Failure to do so may result in civil suits for damages.

• Negligence:

Directors can be held liable for negligence if they fail to exercise due care and skill, causing harm to the company.

• Breach of Contract:

If a director violates a contractual obligation with the company, they may face civil penalties or compensation claims.

2. Criminal Liability:

Under certain circumstances, directors may also face criminal liability for acts that violate laws and regulations. Criminal liability can result in fines, penalties, or imprisonment. Instances of criminal liability:

• Fraud and Misrepresentation:

If directors are involved in fraudulent activities or misrepresentations (e.g., in the company’s financial statements or prospectus), they can be prosecuted under criminal law.

• Non-compliance with Statutory obligations:

Failing to comply with mandatory provisions under the Companies Act, such as filing statutory returns or maintaining proper accounts, can attract criminal penalties.

3. Statutory Liability:

Companies Act, 2013 imposes certain statutory obligations on directors. Failure to comply with these statutory provisions can result in legal liability. Some key statutory liabilities:

• Failure to maintain Accounts and Financial Statements:

Directors must ensure that the company’s financial records are maintained properly and audited on time.

• Default in filing Annual Returns:

Directors are responsible for ensuring that the company’s annual returns and other mandatory filings are submitted to the Registrar of Companies (ROC) within the prescribed deadlines.

• Non-compliance with Board Meeting requirements:

Directors must conduct meetings as required by law and maintain minutes of such meetings.

4. Vicarious Liability:

Directors may also face vicarious liability for the actions of other employees or agents of the company. If a director authorizes or consents to an unlawful act carried out by another party, they may be held personally liable for that action.

Liability towards Shareholders and Stakeholders

Directors have fiduciary duties towards the company’s shareholders and stakeholders, such as employees, creditors, and suppliers. They are obligated to:

• Act in Good Faith and with a view to promoting the success of the company for the benefit of its members.
• Avoid Conflicts of interest, ensuring that they do not profit personally from their position at the expense of the company or its shareholders.

Failure to adhere to these obligations may result in legal action taken by shareholders or stakeholders against the directors. Courts may order directors to compensate stakeholders or return any undue gains.

Liability in Case of Insolvency:

If a company is heading towards insolvency or winding up, directors have a heightened duty of care. They must act in the best interests of creditors and take steps to mitigate any potential losses. If directors fail to do so, they may be held personally liable for the company’s debts. Specific cases where directors may face liability:

• Fraudulent Trading:

If it is proven that the director knowingly carried on business with the intent to defraud creditors or for any fraudulent purpose.

• Wrongful Trading:

When directors fail to take appropriate steps to minimize losses for creditors when they knew or should have known that the company was insolvent.

Relief from Liability:

Directors may, in certain cases, be relieved from liability under specific provisions of the Companies Act, 2013. For example:

• Diligence:

If a director can demonstrate that they acted with due care, skill, and diligence, they may be able to avoid liability.

• Good Faith:

Directors who act in good faith, with honest intentions and for the benefit of the company, may have limited liability, particularly in civil cases.

Resignation of a director is an essential aspect of corporate governance, allowing directors to step down from their position for various reasons. The Companies Act, 2013 provides a structured framework for the resignation process, ensuring transparency and accountability within a company.

Grounds for Resignation

Directors may choose to resign for various reasons:

• Personal or professional commitments.
• Differences in opinion with other board members or management.
• Health issues or personal circumstances.
• Dissatisfaction with company performance or governance practices.
• Desire to pursue other opportunities.

Notice of Resignation

Under Section 168 of the Companies Act, a director wishing to resign must provide a written notice to the company. Key points regarding the notice of resignation:

• Format: The resignation must be communicated in writing, and there is no prescribed format; however, it should clearly state the intention to resign.
• Duration: The notice period is not specified in the Act; however, it is considered good practice for directors to provide reasonable notice to allow the company to make necessary arrangements.
• Submission: The notice should be submitted to the company secretary or the board of directors.

Board Meeting

After receiving the resignation notice, the board of directors must acknowledge the resignation at its next meeting. The key steps are:

• Acknowledgment: The board should formally acknowledge the receipt of the resignation.
• Discussion: The board may discuss the reasons for resignation if the director wishes to share them, although this is not mandatory.
• Resolution: A resolution may be passed to accept the resignation.

Filing with the Registrar:

Once the resignation is accepted, the company is required to file a notice of resignation with the Registrar of Companies (ROC). This is done using Form DIR-12, and it must be filed within 30 days of the resignation. The form should contents:

• Details of the resigning director.
• Date of resignation.
• Confirmation that the resignation has been accepted by the board.

Director Identification Number (DIN):

The resignation does not affect the Director Identification Number (DIN) of the resigning director. The DIN remains valid even after the resignation, allowing the individual to be appointed as a director in the future if they wish.

Rights of Resigning Directors:

Resigning directors have certain rights during the resignation process:

• Right to a Fair Process: Directors can expect a transparent process regarding their resignation.
• Right to Notification: The resigning director has the right to receive formal acknowledgment from the board regarding their resignation.
• Right to Representations: If the resignation is due to dissatisfaction with the company’s affairs, the director can make a representation regarding their concerns, which should be circulated to the board.

Consequences of Resignation

The resignation of a director can have several implications for the company:

• Impact on Board Composition: The resignation may affect the composition and effectiveness of the board, particularly if the director held a key position.
• Need for Replacement: The company may need to appoint a new director to fill the vacancy, ensuring compliance with the minimum director requirements as per the Companies Act.
• Potential Legal Obligations: If a director resigns amidst ongoing investigations or legal proceedings, the company must ensure that all legal obligations and disclosures are met.

Post-Resignation Obligations

After resignation, the director may have certain obligations:

• Return of Company Property: The resigning director must return any company property, documents, or information in their possession.
• Non-Disclosure of Confidential Information: The director must maintain confidentiality regarding sensitive company information even after resignation, as per the fiduciary duties owed to the company.
• Cooperation with Company: The director may be required to cooperate with the company in any ongoing matters or inquiries that relate to their tenure.

Share offer is a method used by companies to raise capital by offering shares to investors. These shares represent a portion of ownership in the company, and by buying them, investors become shareholders with a claim on the company’s assets, profits, and, in some cases, voting rights. The share offer can take different forms, depending on the company’s financial needs, its growth stage, and the target investors. Share offers are an essential part of a company’s capital-raising strategy and contribute to the development of vibrant financial markets.

Share offers can be categorized into several types: Initial Public Offerings (IPO), Follow-on Public Offers (FPO), Offer for Sale (OFS), and Private Placements. Each of these methods serves different purposes and attracts different types of investors. Companies must comply with the regulatory framework, such as the Securities and Exchange Board of India (SEBI) guidelines, to ensure transparency and protect investor interests.

Types of Share Offers

Initial Public Offering (IPO)

An IPO is when a company offers its shares to the public for the first time, transitioning from a private entity to a publicly traded company. Through an IPO, companies raise capital from the public by listing their shares on a stock exchange. Investors can buy these shares, making them part-owners of the company.

Key Features of an IPO:

• Public Participation: The public gets an opportunity to invest in the company for the first time.
• Price Discovery: The price of the shares is usually determined through a process called book building, where investors bid for shares within a predetermined price range.
• Regulatory Compliance: Companies need to file a detailed prospectus with SEBI, which outlines their financial status, business plans, and risks associated with the investment.

IPOs allow companies to raise significant capital, enhance their visibility, and establish a market for their shares. However, the company must meet regulatory requirements and disclose extensive financial information.

Follow-on Public Offer (FPO)

An FPO is when a company that has already gone public issues additional shares to the public. This can be done for raising more capital for expansion, reducing debt, or meeting other financial goals.

Key Features of an FPO:

• Expansion of Shareholding: The company widens its shareholder base by offering more shares.
• Two Types of FPO: Companies may issue either dilutive shares (new shares that increase the total number of shares) or non-dilutive shares (existing shares sold by major shareholders without increasing the total share count).
• Price Determination: Like an IPO, the price of FPO shares can be determined through a fixed price offer or book building.

FPOs are a way for already listed companies to raise additional funds, and they are generally less risky for investors compared to IPOs because the company already has a public track record.

Offer for Sale (OFS)

An OFS is a method used by the promoters or large shareholders of a company to sell their existing shares to the public. In this case, the company does not issue any new shares, and the capital raised goes directly to the selling shareholders, not to the company.

Key Features of an OFS:

• No New Capital for the Company: Since existing shares are sold, the company does not raise new capital.
• Regulated Process: OFS is commonly used by the government or institutional investors to dilute their stakes in public sector enterprises or other large companies.
• Short Window: OFS is conducted over a short duration, often one or two days.

OFS is a quick and efficient method for large shareholders to reduce their stake without diluting the company’s equity.

Private Placement

In private placement, shares are offered to a small group of select investors, such as institutional investors, rather than the general public. This method is faster and less costly than a public offer and is used by companies that need to raise capital quickly or avoid the regulatory requirements of an IPO.

Key Features of private placement:

• Selective Investors: Only specific institutional investors or accredited individuals are invited to participate.
• Faster Process: Private placement does not require as much regulatory approval or disclosure as a public offering.
• Lower Costs: Since fewer investors are involved, the costs of raising capital through private placement are lower compared to public offers.

Subscription Stage is a crucial phase in the formation of a company where the company seeks to raise capital by offering shares to potential investors, typically after the Certificate of Incorporation has been issued. This stage involves inviting the public or selected individuals to subscribe to the company’s shares, which provide the initial capital necessary for the company to commence its business activities.

Companies Act, 2013, governs the process of subscription, ensuring that companies follow regulatory guidelines for raising capital, protecting the interests of both the company and the investors. In India, companies can either raise funds through private placement, public subscription, or by issuing shares to pre-selected groups of investors.

Key Steps in the Subscription Stage:

The Subscription Stage involves several critical steps, ensuring a transparent and legally compliant process of capital formation. These steps differ slightly depending on whether the company is a private limited company or a public limited company:

1. Preparation of Prospectus

For public limited companies, the process begins with the preparation of a prospectus, which is a formal document inviting the public to subscribe to the company’s shares. The prospectus provides detailed information about the company, including:

• The company’s objectives
• Financial health
• Risk factors
• Rights of shareholders
• The terms and conditions of the share offering

This document is crucial as it ensures transparency and allows potential investors to make informed decisions. Private limited companies are generally prohibited from inviting the public to subscribe to their shares and therefore do not issue a prospectus.

2. Filing with the Registrar of Companies

Before shares are issued to the public or private investors, the company must file the prospectus or statement in lieu of a prospectus with the Registrar of Companies (RoC). This step ensures that the company is compliant with legal requirements and that potential investors have access to verified information.

3. Share Allotment

Once the prospectus is published, the company invites investors to apply for shares. Investors apply by filling out application forms and depositing the required funds. Based on the response, the company allots shares. The company may face two scenarios:

• Under-subscription: If the number of shares applied for is less than the number offered, it is called under-subscription. In such cases, the company may not be able to raise the required capital and may need to revise its strategy.
• Over-subscription: If the demand for shares exceeds the number of shares offered, it is called over-subscription. In such cases, the company allots shares based on a pre-determined process, such as lottery or proportional allocation.

Once shares are allotted, investors receive share certificates, making them formal shareholders of the company. The allotment of shares must comply with the rules laid out in the prospectus or subscription agreement.

4. Minimum Subscription

A critical aspect of the Subscription Stage is the concept of minimum subscription. The minimum subscription is the amount that the company must raise in order to proceed with its business activities. According to the Companies Act, the company must collect at least 90% of the issued capital for a successful subscription. If the minimum subscription is not achieved, the company must refund the money collected from investors.

This provision ensures that the company does not proceed with insufficient capital, which could otherwise jeopardize its business plans and its ability to meet financial obligations.

5. Commencement of Business

After successfully raising the required capital, public companies (and certain private companies) must file a declaration of receipt of minimum subscription with the Registrar of Companies. This declaration confirms that the company has received the necessary funds to commence its business operations. Only after this declaration is accepted can the company begin conducting business.

In the case of public limited companies, the Certificate of Commencement of Business is issued after the subscription stage is completed. Private companies, however, can generally commence business immediately after incorporation, provided their capital structure is adequate.

Methods of Subscription:

There are three primary methods by which companies raise funds during the Subscription Stage:

1. Public Subscription

Public subscription involves inviting the general public to subscribe to the company’s shares. This method is typically employed by public limited companies. It requires the preparation and filing of a detailed prospectus. Public subscription allows the company to raise large amounts of capital from a broad base of investors, but it also involves greater scrutiny from regulators and a higher level of transparency.

2. Private Placement

In private placement, the company offers shares to a select group of investors, often institutional or sophisticated investors. This method is usually employed by private limited companies or by public companies that prefer not to issue shares to the general public. Private placement allows companies to raise capital quickly and with fewer regulatory requirements, but it limits the pool of potential investors.

3. Right issue

In a right issue, the company offers shares to its existing shareholders in proportion to their current shareholding. This method allows shareholders to maintain their ownership percentage while the company raises additional capital. Right issues are typically used by companies that wish to raise capital without diluting control among new investors.

According to Section 455 of the Companies Act, 2013, a Dormant Company is defined as a company that has no significant accounting transactions during a financial year or has not undertaken any business operations for two consecutive financial years. Dormant companies can exist for various reasons, including strategic planning for future business activities, tax benefits, or the desire to maintain a company name for future use without incurring significant operational costs.

Features of a Dormant Company:

1. Lack of Business Activity

The primary feature of a dormant company is its lack of significant business activity. This means that it has not engaged in any commercial operations, transactions, or activities that generate income or expenses during the specified periods.

2. Minimal Compliance Requirements

Dormant companies are subject to fewer compliance requirements compared to active companies. They are exempt from certain annual filings and disclosures, which reduces administrative burdens. However, they must still comply with some regulatory obligations to maintain their dormant status.

3. Preservation of Corporate Identity

Dormant companies can retain their corporate identity and name, which can be beneficial for businesses planning to reactivate the company in the future. This preservation allows the original owners to keep their brand and market presence without the need to create a new company.

4. Potential for Reactivation

A dormant company can be reactivated at any time by resuming business operations. Upon reactivation, it must comply with the standard regulatory requirements and filings applicable to active companies.

5. Tax Benefits

Dormant companies may benefit from certain tax advantages, as they are not subject to tax liabilities associated with active business operations. This feature makes dormant companies an attractive option for entrepreneurs looking to hold a corporate structure without incurring significant costs.

6. Registered Status

Despite being inactive, a dormant company retains its registered status with the Registrar of Companies (ROC). This means it is still recognized as a legal entity and can engage in certain activities, such as entering into agreements or holding assets.

7. No Business Transactions

Dormant company typically has no significant transactions that affect its financial statements. This feature distinguishes it from companies that may be inactive but still engage in minimal transactions, such as maintaining bank accounts or paying fees.

Formation of a Dormant Company:

The formation of a dormant company follows the standard company incorporation process but includes specific provisions to maintain its dormant status. Here are the key steps involved in forming a dormant company:

1. Incorporation of the Company

The first step in forming a dormant company is to incorporate it under the Companies Act, 2013. This involves:

• Choosing a unique name for the company.
• Preparing the Memorandum of Association (MOA) and Articles of Association (AOA).
• Submitting the registration application to the Registrar of Companies (ROC) along with the required documents.

2. Declaration of Dormancy

To establish a company as dormant, the applicants must declare their intention to keep the company inactive. This declaration should be included in the incorporation documents, indicating that the company will not engage in any significant business operations.

3. Filing with the Registrar of Companies

Once the company is incorporated, it must file specific forms with the ROC to formally declare its dormant status. This includes submitting Form MGT-14 for the declaration of dormancy and ensuring compliance with the requirements set by the ROC.

4. Annual Compliance Requirements

Dormant companies must still adhere to certain annual compliance requirements, including:

• Filing annual returns and financial statements with the ROC, although the requirements are less rigorous than for active companies.
• Providing a statement indicating that the company has no significant transactions during the financial year.

5. Maintenance of Records

Although dormant companies are not actively engaged in business, they must maintain proper records and documentation to support their dormant status. This includes keeping track of financial statements, bank statements, and any other relevant documents.

6. Renewal of Dormant Status

Dormant companies must periodically renew their dormant status by filing the necessary documents with the ROC. This renewal ensures that the company continues to meet the criteria for dormancy and remains compliant with regulatory requirements.

Advantages

• Cost Savings:

Dormant companies incur lower operational costs compared to active companies, as they do not engage in significant business activities.

• Brand Preservation:

Dormant companies can retain their brand identity and name, allowing them to resume operations in the future without starting from scratch.

• Flexibility for Future Business:

The dormant status provides flexibility for business owners to plan future operations without the immediate pressures of running an active business.

Challenges

• Limited Growth Opportunities:

Dormant companies cannot engage in active business operations, limiting their growth and revenue potential.

• Compliance Obligations:

Although the compliance requirements are minimal, dormant companies still need to fulfill certain obligations, which may be perceived as a burden by some entrepreneurs.

• Potential for Striking Off:

If a dormant company fails to comply with the annual filing requirements for an extended period, it may be subject to being struck off the register by the ROC, leading to the loss of its corporate identity.

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.