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The genesis of SOX: A Corporate Tsunami . Corporate America was rocked by scandal after scandal in a very short span of time.. EnronKMartTycoWorldComGlobal Crossing. Andersen collapsed
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1. Statutory Role & Responsibility of Independent Directors and Familiarity with Legal Aspects associated with discharging their Duties Atul Dhawan
4 August, 2006
2. The genesis of SOX: A Corporate Tsunami Corporate America was rocked by scandal after scandal in a very short span of time.
3. Andersen collapsed
4. An Angered Response Loss of confidence in regulators
Political nexus
Investor confidence takes a dip
401(k) retirement savings wiped out
5. Types of Directors Nominee- Director whose function is passive in nature. Nominee director are subject to directors responsibilities. Nominee director appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors.
Whole Time- is executive director who is in whole time employment of the company.
Independent- is a non executive director who has no material pecuniary relationship or transactions with the company.
6. Responsibility of Directors Meaning thereof
Statutory Responsibility
Fiduciary Responsibility
Statutory Role and Responsibility
Need for familiarisation with legal aspects
Relationship with duty discharge obligations
7. Key Issues Responsibility
Duty
Statutory
8. What is Duty Generally speaking, duty is what we expect of others
Duty is a task we look forward to with distaste, perform with reluctance, and brag about afterwards
The trouble with the world is that so many people who stand up for their rights fall down miserably on their duties
The best way to get rid of your duties is to discharge them
Next to doing the right thing, the most important thing is to let people know you are doing the right thing John D. Rockfeller
It is not enough to be ready to go where duty calls. A man should stand around where he can hear the call Robert Louis Stevenson
9. Responsibility Responsibility walks hand in hand with capacity and power
Responsibility also is directly linked to ones duties
It is easy to dodge our responsibilities, but we cannot dodge the consequences of dodging our responsibilities
You cannot evade the responsibilities of tomorrow by evading it today - Abraham Lincoln
10. Responsibility The price of greatness is responsibility - Sir Winston Churchill
11. Drivers of Change Democratisation of ownership
Liberalisation
Globalisation of markets
Technology
Corporate Governance
ESOPs
Other influences lenders, regulators, tax authorities
12. The environment in which we work in Changing Economic Times
Pressures to Perform- Wall Street expectations- Shareholder and Board of Director expectations
Complexity and sophistication of Business Structures and Transactions- Numerous risks and challenges of reporting transactions in an easily understood manner
Complex and Voluminous Standards
13. The Role of a Director A Director is part of a collective body of Directors called the Board responsible for the superintendence, control and direction of the affairs of the Company
14. The Role of a Director Is an individual Director as a member of the Company Board equally responsible as the Company Board ?
No, unless he, the individual director, is charged with a specific responsibility
15. The Role of a Director Is the Company Board responsible for management of the Company or for the supervisory oversight of the Company ?
This depends on whether the Company has a CEO to manage the affairs of the Company on a day-to-day basis.
16. Directors duties Act in the best interests of the company
Safeguard the interests of the stakeholders
Attend Board Meetings and participate in decisions
Exercise due care and skill
Avoid conflict situations
Not seek personal gains
Maintain confidentiality
Fiduciary duty
Seek opinion of experts when necessary
Discharge duties required in specific committees of the Board
17. Directors duties Directors are subject to various duties, both common law and statutory. At a very fundamental level, these duties are directed at four well-defined objectives :
to compel directors to act in accordance with the strict terms of their mandate;
to compel them to exercise care and skill in carrying out their various functions;
18. Directors duties to compel them to use their wide discretionary powers in good faith and proper purpose
and finally, to compel them to act loyally in advancing the interest of their company.
Sarah Worthington, Corporate Governance - Remedying and Ratifying Directors Breaches
19. Directors Duties What is a directors duty of skill ?
Directors are not required to bring any special qualifications into their office.
Major Law Reform required in this area
20. Directors Duties What is the duty of care required for a Director ?
The Supreme Court of India has held in Official Liquidator v P.A. Tendolkar (1973) 43 Comp Cases 382 as follows:
A director may be shown to be so placed and to have been so closely and so long associated personally with the management of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of the Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to every one who examines the affairs of the Company even superficially
21. Directors Duties What is the non-executive directors duty of skill and care ?
The English Court after reviewing many cases in Dorchester Finance Co. Ltd v Stebbing, 1989 BCLC498 (Ch D) held as follows:
A Director is to exhibit in the performance of his duties such degree of skill as may be reasonably expected from a person of his knowledge and experience
A Director is to exhibit in the performance of his duties such care as an ordinary man might be expected to take on his own behalf
A Director must act in good faith and in the best interests of the Company
These standards of duty of care and skill apply equally to non-executive Directors
22. Directors Duties Acting in good faith a valid defense for the Directors
In Re The Walt Disney Company, the US Court in its decision decided in August 2005 upheld the rule of acting in good faith by saying that the concept of intentional dereliction of duty, a conscious disregard for ones responsibilities, is an appropriate (although not the only), standard for determining whether fiduciaries have acted in good faith
23. Directors Responsibilities Present directors
Past directors
Members of Audit Committee
Explicit and implicit
Responsibility for subsidiaries
24. Statutory Responsibilities Section 274 of the Companies Act list out disqualifications of directors. Director should conduct himself in such a way that he does not incur such disqualification
Director should maintain absolute secrecy of confidential information
Director should not derive undue personal advantage or benefit by virtue of his position
Director should ensure that company at all times complies with statutes, rules and regulations in letter and spirit
Director with other Directors of the Board is responsible that report and recommendation of Audit Committee and Shareholders / Investors Grievance Committee receive due consideration
Director is accountable for the company practicing the highest standard of corporate governance with a underlying view of increasing the shareholders value
25. Fiduciary Duty of Directors Director should not enter into engagements in which he can have a personal interest conflicting with the interest of the company.
Director must display the utmost good faith towards the company in their dealings with it or on its behalf.
26. Directors Responsibilities Arthur Levitts views
Blue Ribbon Committee
Section 292A and Audit Committees
Section 217 (2AA)
Clause 49 of Listing Agreement
27. Recommendation of Blue Ribbon Committee Member of the Audit Committee to be independent of the company (not employees)
The Audit committee to be composed exclusively of non executive directors
The Audit Committee to consist of at least three member with specialist expertise in the field of finance and accounting
The Audit committee to have a written charter
The charter to be published at least every three years in a proxy statement
28. Recommendation of Blue Ribbon Committee The external auditors to be accountable to the Board of Directors and particularly to the audit committee.
The external auditors to report annually on their independence from the company.
The audit committee to discuss the quality of accounting principles with the external auditors.
The audit committee to produce a report on its activities.
Quarterly financial statements (form 10-Q) to undergo a critical review by the external auditors
29. Section 217(2AA) Report by Board of Directors includes Directors responsibility Statement indicating therein
In preparation of annual accounts, applicable accounting standard has been followed along with explanations to material departures.
That accounting policies has been selected and applied consistently and made judgment and estimates that are reasonable and prudent.
Proper and sufficient care for the maintenance of accounting records in accordance with the act for safeguarding the assets of company and for detecting and preventing fraud
Prepared annual accounts on a going concern basis
30. Section 274 clause (g) such person is already a director of a public company
(A) has not the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April 1999; or
(B) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such default continues for one year or more:
Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director failed to file annual accounts and annual return or has failed to repay its deposit or interest or redeem its debentures on due date or pay dividend
31. Section 292A Audit committee shall consist of at least three directors other than managing director or whole time director.
Audit Committee shall have discussion with auditors about internal control systems, the scope of audit and review half yearly and annual financial statements.
Audit committee has authority to investigate into any matter.
The recommendations of the Audit committee is binding on the Board
The chairman of the Audit Committee shall attend the annual general meeting to provide clarification on matters relating to audit
32. Clause 49 of Listing Agreement The non executive director on the board should not be less than fifty percent of the Board of Directors or in the case of non executive chairman at least should comprise of independent directors
The board meeting is to be held at least four times in a year.
The difference between two Board meeting should not exceed four months
The Annual Report of a company should comprise a separate section in Corporate Governance. Non compliance of any mandatory requirement which is a part of listing agreement to be specifically highlighted with a reason for such non compliance.
The compliance of conditions of corporate governance is to be certified by auditors and the same is to be annexed with directors report and also sent to the Stock Exchange with return
33. Clause 49 Kumarmangalam Birla committee on corporate governance SEBI 1999
Narayana Murthy committee on corporate governace The term Clause 49 refers to clause number 49 of the Listing Agreement between a company and the stock exchanges on which it is listed (the Listing Agreement is identical for all Indian stock exchanges, including the NSE and BSE).
This clause is a recent addition to the Listing Agreement and was inserted as late as 2000 consequent to the recommendations of the Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities Exchange Board of India (SEBI) in 1999.
Clause 49, when it was first added, was intended to introduce some basic corporate governance practices in Indian companies and brought in a number of key changes in governance and disclosures (many of which we take for granted today). It specified the minimum number of independent directors required on the board of a company. The setting up of an Audit committee, and a Shareholders Grievance committee, among others, were made mandatory as were the Managements Discussion and Analysis (MD&A) section and the Report on Corporate Governance in the Annual Report, and disclosures of fees paid to non-executive directors. A limit was placed on the number of committees that a director could serve on.
In late 2002, SEBI constituted the Narayana Murthy Committee to assess the adequacy of current corporate governance practices and to suggest improvements. Based on the recommendations of this committee, SEBI issued a modified Clause 49 on October 29, 2004 (the revised Clause 49) which came into operation on January 1, 2006.The term Clause 49 refers to clause number 49 of the Listing Agreement between a company and the stock exchanges on which it is listed (the Listing Agreement is identical for all Indian stock exchanges, including the NSE and BSE).
This clause is a recent addition to the Listing Agreement and was inserted as late as 2000 consequent to the recommendations of the Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities Exchange Board of India (SEBI) in 1999.
Clause 49, when it was first added, was intended to introduce some basic corporate governance practices in Indian companies and brought in a number of key changes in governance and disclosures (many of which we take for granted today). It specified the minimum number of independent directors required on the board of a company. The setting up of an Audit committee, and a Shareholders Grievance committee, among others, were made mandatory as were the Managements Discussion and Analysis (MD&A) section and the Report on Corporate Governance in the Annual Report, and disclosures of fees paid to non-executive directors. A limit was placed on the number of committees that a director could serve on.
In late 2002, SEBI constituted the Narayana Murthy Committee to assess the adequacy of current corporate governance practices and to suggest improvements. Based on the recommendations of this committee, SEBI issued a modified Clause 49 on October 29, 2004 (the revised Clause 49) which came into operation on January 1, 2006.
34. Definition Excludes any relatives of promoters, senior management
Cooling-off Period - for any member of any advisory firm (not just statutory auditors, but also lawyers, consultants and internal auditors)
35. Increased responsibilities Enhances the responsibilities of the board
Companys compliance with all applicable laws to be disclosed
Enhanced oversight over its subsidiaries
Board members also have to review all significant transactions entered into by any subsidiary
Review minutes of all the subsidiaries board meetings
Sign-off on compliance with the companys code of conduct
36. Improving quality of disclosure Disclosure of directors shareholding in the company
Disclosure of compensation paid to non-executive directors
Disclosure of all related-party transactions
Use of funds raised through public issues (in case of any use of funds for purposes other than that originally stated in the offer prospectus),
An audited statement on the deviation to be included in the annual report,
Any changes in accounting policies and practices.
37. Liability For company debts
Ultra-vires acts
Criminal liability under Negotiable Instruments Act
Damages for breach of contract
Directors responsibility statements
Liability of directors under other laws (labour, food adulteration, essential commodities, etc.)
38. Some Company Law Provisions Non compliance of various provisions of the Act
Avoidance of provisions relieving liability of officers void
Unlimited liability (Section 323) permissible
Statutory Protection to Directors (Section 633)
Directors Responsibility Statement
39. CEO / CFO responsibilities The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging that function shall certify to the Board that:
(a) They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief :
(i) these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;
(ii) these statements together present a true and fair view of the companys affairs and are in compliance with existing accounting standards, applicable laws and regulations.
40. Management certification Management has to certify the key financial assertions like completeness, validity, valuation etc. underlying in the preparation of the financial statements.
Opinion of the statutory auditors is not the only criterion on which the financial statements will be evaluated.
Responsibility on the management to ensure compliance with applicable standards, laws etc. and to ensure that the financial statements give true and fair view of the affairs of the Company.
41. Management certification They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.
42. Guidance for Independent Directors-The Taste and Smell Tests Reputation of company
Capability to meet the requirements and expectations
Demonstrate independence
Whether the company has adequate controls and whether they can be relied upon
Ability to resist pressure
43. Guidance for Independent Directors-The Taste and Smell Tests Knowledge on current developments
Aware and abide by corporate code of conduct
Seek expert help
Prepare in advance for board meetings
Maintain confidentiality
44. Way Ahead Independent directors here to stay
Board and audit committee procedures will need to be revamped
Need to be more proactive at watching over compliance
Identify and manage risks
Have processes to test and evaluate controls