CII TASK REPORT ON CORPORATE GOVERNANCE-

The CII Report on Corporate Governance enumerates a set of voluntary recommendations with an objective to establish higher standards of probity and corporate governance in the country.

The CII Report on Corporate Governance enumerates a set of voluntary recommendations with an objective to establish higher standards of probity and corporate governance in the country. It enunciates additional principles that can improve corporate governance in spirit and in practice.

The recommendations outlined in this report are aimed at listed companies and wholly-owned subsidiaries of listed companies.

Board of Directors

1. Appointment of Directors – recommended by Nomination Committee An active, well-informed, and independent Board is necessary to ensure the highest standards of corporate governance. Getting the right people is crucial; as is the process of seeking, vetting, and appointing such people. The report thus recommends constitution of the Nomination Committee comprising a majority of independent directors, including its chairman to search for, evaluate, shortlist and recommend appropriate independent directors, NEDs as well as executive directors.

2 Issue of formal Letter of Appointment to NEDs and Independent Directors The Letter of Appointment should specify the expectation of the Board from the appointed director; the fiduciary duties that come with such an appointment; the liabilities that accompany such a fiduciary position, including whether the concerned director is covered by any Directors and Officers (D&O) insurance; and the remuneration, including sitting fees and stock options.

The letter should be disclosed to shareholders at the time of the ratification of the director’s appointment or re-appointment to the Board.

3. Fixed Contractual Remuneration for non-executive directors The law should have the option of giving a fixed contractual remuneration to NEDs and independent directors, which is not linked to the net profit or lack of it. Companies should have a choice between paying a commission on profits or paying fixed contractual remuneration.

Whether it is from net profits or as a fixed contractual payment, the structure of remuneration to NEDs and independent directors needs to be transparent, well-specified and made available to shareholders in the annual report of the company.

4. Structure of Compensation to NEDs The Task Force recommends that listed companies use the following template in structuring their remuneration to NEDs and independent directors

• Fixed component: This should be relatively low, so as to align NEDs and independent directors to a greater share of variable pay. Typically, these are not more than 30% of the total cash remuneration package.

• Variable Component: Based on the attendance of Board and Committee meetings (at least 70% of all meetings should be an eligibility pre-condition)

• Additional payment for being the chairman of the Board, especially if he/she is a non-executive chairman

• Additional payment for being the chairman of the Audit Committee

• Additional payment for being the chairman of other committees of the Board

• Additional payment for being members of Board committees: Audit, Shareholder Grievance, Remuneration, Nomination, etc.

Any such structure of remuneration, which is adopted by the Board should be disclosed to the shareholders in the annual report of the company.

5. Remuneration Committee of the Board

The Remuneration Committee should comprise at least three members, the majority of whom should be independent directors.

• It should have delegated responsibility for setting the remuneration for all executive directors and the executive chairman, including any compensation payments, such as retiral benefits or stock options. It should also recommend and monitor the level and structure of pay for senior management, i.e. one level below the Board.

• The Remuneration Committee should make available its terms of reference, its role, the authority delegated to it by the Board, and what it has done for the year under review to the shareholders in a separate section of the chapter on corporate governance in the annual report.

6. Audit Committee Constitution

Listed companies should have at least a three-member Audit Committee comprising entirely of non-executive directors with independent directors constituting the majority.

7. Separation of Offices of Chairman & Chief Executive Officer

The Task Force recognized the ground realities of India. Keeping these in mind, it has recommended, wherever possible, to separate the office of the Chairman from that of the CEO.

8. Board Meetings through Tele-conferencing

If a director cannot be physically present but wants to participate in the proceedings of the board and its committees, then a minuted and signed proceeding of a teleconference or video conference should constitute proof of his or her participation. Accordingly, this should be treated as presence in the meeting(s). However, minutes of all such meetings or the decisions taken thereat, recorded as circular resolutions, should be signed and confirmed by the director/s who has/have attended the meeting through video conferencing.

9. Executive Sessions of the Independent Directors

While the independent directors are kept updated on all business-related issues and new initiatives by the management, it is imperative that the independent directors have executive sessions (as their internal discussion and debating process to evolve a consensus among independent directors).

To empower independent directors to serve as a more effective check on management, the independent directors could meet at regularly scheduled executive sessions without management and before the Board or Committee meetings discuss the agenda.

The Task Force also recommends separate executive sessions of the Audit Committee with both internal and external Auditors as well as the Management.

10. The role of the board and shareholders in related party transactions Audit Committee, being an independent Committee, should pre-approve all related party transactions which are not in the ordinary course of business or not on “arms-length basis” or any amendment of such related party transactions. All other related party transactions should be placed before the Committee for its reference.

11. Auditors’ Revenues from the Audit Client

No more than 10% of the revenues of an audit firm singly or taken together with its subsidiaries, associates or affiliated entities, should come from a single corporate client or group with whom there is also an audit engagement.

12. Certificate of Independence

Every company must obtain a certificate from the auditor certifying the firm’s independence and arm’s length relationship with the client company. The Certificate of Independence should certify that the firm, together with its consulting and specialized services affiliates, subsidiaries, and associated companies or network or group entities have not / has not undertaken any prohibited non-audit assignments for the company and are independent vis-à-vis the client company, by reason of revenues earned and the independence test are observed.

13. Audit Partner Rotation

The partners handling the audit assignment of a listed company should be rotated every six years. The partners and at least 50% of the audit engagement team responsible for the audit should be rotated every six years, but this should be staggered so that on any given day there isn’t a change in partner and engagement manager.

A cooling-off period of 3 years should elapse before a partner can resume the same audit assignment.

14. Auditor’s Liability

The firm, as a statutory auditor or internal auditor, has to confidentially disclose its net worth to the listed company appointing it. Each member of the audit firm is liable to an unlimited extent unless they have formed a limited liability partnership firm or company for professional services as permitted to be incorporated by the relevant professional disciplinary body (ICAI). Even in the case of a limited liability firm undertaking audit in the future, under the new law, the individual auditor responsible for dereliction of duty shall have unlimited liability, and the firm and its partners shall have liability limited to the extent of their paid-in capital and free or undistributed reserves.

15. Appointment of Auditors

The Audit Committee of the board of directors shall be the first point of reference regarding the appointment of auditors. The Audit Committee should have regard to the entire profile of the audit firm, its responsible audit partner, his or her previous experience of handling audit for similar-sized companies, and the firm and the audit partner’s assurance that the audit clerks and/or understudy chartered accountants or paralegals appointed for the discharge of the task for the listed company shall have done a minimum number of years of study of Accounting Principles and have minimum prior experience as audit clerks.