Corporate Governance and
Ethics
UNIT - 3
Practices of Corporate
Governance
Selection, compensation, succession, and
removal of Board of Directors, composition
and role of board
Auditors: roles and responsibilities
Board of Directors
A board of directors, also known as a “Board” or "BOD“.
It is a group of people elected by a company's shareholders to represent their interests. The board
acts as a governing body for a company or corporation. Their primary goal is to protect the assets of
the shareholders by ensuring an organization's management acts on their behalf and that they get a
good return on their investment (ROI) in the company.
Types of board members:
An effective board should represent both management and shareholder interests and include
members from within and outside the business. They include:
Outside directors:
These members are expected to bring an independent view to company issues. They are not
involved in the company’s daily operations. Outside directors are often chosen for their expertise in
associated business fields. Since they are not a company employee, they receive reimbursement or
pay to attend meetings.
Inside directors:
Inside directors are company employees whose experience brings value to the board. They are not
compensated because they are often already a C-level executive, major shareholder or a union
representative.
Composition of BOD
The board of directors can be called the brain of the company. They are responsible for taking all the
big decisions and making policy changes. These decisions are taken in special meetings members of
the board hold together, called ‘Board Meetings’.
Section 149 of the Companies Act states that every company’s board of directors must necessarily
have a minimum of three directors if it is a public company. two directors if it is a private company and
one director in a one person company.
1) The maximum number of members a company can assign as directors is fifteen. However, the
company can pass a special resolution in a general meeting to allow for assigning more than fifteen
members to the board of directors.
2) The maximum number of companies that an individual can become a director of, is 20 companies.
3) At least one director, who has lived in India for a minimum of 182 calendar days of the previous year,
shall be appointed by every company’s board. It is a mandatory rule.
4) At least, one woman director must be appointed by the company.
5) All listed companies must have at least one-third proportion of their board of directors as independent
directors.
Selection of BOD
The most important qualification is relevant industry experience
Companies also prefer board candidates with senior-level executive experience
1) Chief executive officers (active or former)
2) Chief financial officers
3) Chief operating officers
Other background preferences:
4) Women — Risk
5) Ethnic minority — Technology
6) Financial — Marketing
7) International — Regulatory
• Managerial, industry, and functional knowledge
• Contribute to advisory: strategy, succession, shareholder/stakeholder relations.
• Contribute to oversight: risk management, performance measurement.
• Active CEOs are busy; unavailable on short notice; miss or are late for meetings
• Can be bossy, poor collaborators, poor listeners
International experience is important as companies enter new markets
1) Directors with this knowledge help the board understand strategy, operations, finance, risk, and
regulations
2) Directors may have contacts with government officials, suppliers, manufacturers, distributors, and
customers
3) Representation of directors with international experience is low but has been increasing
Contd..
Companies need directors to advise on specialized areas
1) Research, development, and production
2) Turnarounds and restructuring
3) Regulations and law
4) Mergers, acquisitions and divestitures
• More time to dedicate to boardroom responsibilities.
• Extensive personal and professional networks.
• Might be too “busy” if they serve on many boards concurrently.
• Might not be effective monitors if they view directorship as a form of
“active retirement.
Role of BOD
1) First, to select the chief executive officer (CEO) and to oversee the CEO and senior
management in the competent and ethical operation of the corporation on a day-to-
day basis
2) Second, it is the responsibility of management to operate the corporation in an
effective and ethical manner to produce value for shareholders. Senior management
is expected to know how the corporation earns its income and what risks the
corporation is undertaking in the course of carrying out its business. The CEO and
board of directors should set a “tone at the top” that establishes a culture of legal
compliance and integrity. Management and directors should never put personal
interests ahead of or in conflict with the interests of the corporation
3) Third, it is the responsibility of management, under the oversight of the audit
committee and the board, to produce financial statements that fairly present the
financial condition and results of operations of the corporation and to make the timely
disclosures investors need to assess the financial and business soundness and risks
of the corporation
4) Fourth, it is the responsibility of the board, through its audit committee, to engage an
independent accounting firm to audit the financial statements prepared by
management, issue an opinion that those statements are fairly stated in accordance
with Generally Accepted Accounting Principles and oversee the corporation’s
relationship with the outside auditor
Contd..
5) Fifth, it is the responsibility of the board, through its corporate governance
committee, to play a leadership role in shaping the corporate governance of
the corporation. The corporate governance committee also should select and
recommend to the board qualified director candidates for election by the
corporation’s shareholders
6) Sixth, it is the responsibility of the board, through its compensation committee,
to adopt and oversee the implementation of compensation policies, establish
goals for performance-based compensation, and determine the compensation
of the CEO and senior management
7) Seventh, it is the responsibility of the board to respond appropriately to
shareholders’ concerns
8) Eighth, it is the responsibility of the corporation to deal with its employees,
customers, suppliers and other constituencies in a fair and equitable manner
Removal of Directors
A company may replace a director for a variety of reasons.
1) Requires new skills and capabilities on the board
2) Company wants to “refresh” the board
3) Director wishes to retire
4) Director reaches mandatory retirement age
5) Director is negligent or performing below expectations
6) Director has irresolvable disagreement with other directors or management
• Shareholders often do not know the real reason a director leaves the board
The process for removing a director is complicated. The board does not have the power
to remove a fellow board member. It must either:
• Wait to replace the director at the annual meeting
• Encourage him/her to resign
• Establish term or age limits
Shareholders, too, have limited rights to remove directors
• Pass special resolution, if they can demonstrate cause
• Vote for removal, if election is by majority voting
Who is an Auditor?
Auditors are specialists who review the accounts of companies and
organizations to ensure the validity and legality of their financial records.
They can also act in an advisory role to recommend possible risk aversion
measures and cost savings that could be made
Auditors work in the accounting departments of a huge range of firms and
with independent chartered and certified firms, examining the money going
in and out of organizations and making sure it is recorded and processed
correctly
Roles of an Auditor
1. Collating, checking and analyzing spreadsheet data
2. Examining company accounts and financial control systems
3. Gauging levels of financial risk within organizations
4. Checking that financial reports and records are accurate and reliable
5. Ensuring that assets are safeguarded
6. Identifying if and where processes are not working as they should and
advising on changes to be made
7. Preparing reports, commentaries and financial statements
8. Liaising with managerial staff and presenting findings and
recommendations
9. Ensuring procedures, policies, legislation and regulations are correctly
followed and complied with
10.Undertaking reviews of wages
Thanks
