Module – 4

Board Committees and Role of Professionals

Board Committees
A board committee is a small working group identified by the board, consisting of board
members, for the purpose of supporting the board’s work. Committees are generally formed to
perform some expertise work. Members of the committee are expected to have expertise in the
specified field.
Committees are usually formed as a means of improving board effectiveness and efficiency,
in areas where more focused, specialized and technical discussions are required, the Board of
Directors are ultimately responsible for the acts of the committee. Board is responsible for defining
the committee role and structure

Audit Committee
Audit Committee in one of the main pillars of corporate governance any mechanism in
company. The Audit Committee aims to enhance the confidence in the integrity of the company’s
financial reporting. Establishment of Audit Committee for companies of having capital less than
Five crore was not mandatory under Companies Act, 1956.

Functions of Audit Committee

1. Appointment and fixation of the remuneration of the Auditor. 1
2. Valuation of the undertakings or assets of the company.
3. Evaluation of any Related Party Transaction (also for omnibus approval under Rule 6A)
4. Evaluation of the Internal financial control and risk management.
5. Examination of the Financial Statements.
6. Scrutiny of inter/corporate loans and investments
7. Evaluation of funds raised through public offers.

Nomination and Remuneration Committee (NRC)

The Nomination and Remuneration Committee shall formulate the criteria for determining
qualifications, positive attributes and independence of a director and recommend to the Board a
policy, relating to the remuneration for the directors, key managerial personnel
and other employees.
Shareholders' Grievance Committee
In terms of Clause 49-1V(G)(iii) of the Listing Agreement, a board committee under the
chairmanship of a non-executive director shall be formed to specifically look into the redressal of
shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-
receipt of declared dividends etc. This committee shall be designated as "Shareholders/ Investors
Grievance Committee".

Corporate Social Responsibility (CSR) Committee

CSR Committee would formulate the CSR Policy of the Company, recommend the
expenditure that can be incurred for this purpose and monitor such policy c f the company from
time to time. Sec 135 (1) read with rule 3 of Companies (Corporate Social Responsibility Policy)
Rules, 2014, mandates every company.

Other committee
1. Risk Management Committee
2. Investment Committee
3. Safety, Health and Environment Committee
4. Selection Committee
5. Board Development or Governance Committee.

Need / Functions / Objective / Advantages and Purpose of the Committee

1. To guide the Board in relation to appointment and removal of Directors.
2. Formulate the criteria for determining qualifications, positive attributes and independence
of a director and recommend to the Board a policy relating to the remuneration of directors
and Key Managerial personnel.
3. Formulation of criteria for evaluation of Board of Directors including the Independent
Director.
4. To Recommend the Board on Remuneration payable to the directors, Key Managerial
Personnel and Senior Management.
5. To retain, motivate and promote talent and to ensure long term sustainability of talented
managerial persons and create competitive advantage.
6. To assist the Board in fulfilling all related responsibilities

Scope of Board Committee

1. Establishing a clear organizational mission
2. Forming the strategic plan to accomplish the mission
3. Overseeing and evaluating the plan's success
4. Providing general support to the executive director and the president
 5. Functioning as an incubator and feedback mechanism for board, committee, and member
proposals
6. Establishing and maintaining a board culture that is open, inclusive and promotes generative
thinking.
7. Hiring a competent executive director Reviewing and updating the executive director
succession plan
8. Providing adequate supervision to the executive director
Board committee’s Character
Board committee charters should be as detailed and clear as possible. This will help
everyone understand the role of each board member, as well as the communication process
among members. Here's a sample template of a board committee charter

Independence of Board Committee members

The members of the Board Committees should have independence to take decisions. An
independent majority on the Board is more to consider the best Interest of shareholders.
Independence of Board Committee supports independent decision-making and reduce or totally
avoid conflicts of interest that may arise.
Independence of members of Committees gives them the ability to care for themselves-
either emotionally, physically or financially. As a result, they will be in better situation
to assess others.

Disclosure in Annual Report

The findings of various Board Committees of a company, for any given years, has to be
incorporated in Directors' Report, which is presented in AGM of the company.

Integrity of financial reporting system

Integrity is one of the principles of good governance systems. While disclosing the financial
reports to shareholders and others concerned with governance of a company, the Board and
directors are expected to be honest in presenting genuine and audited financial statements to
shareholders in AGM.

Role of Professional in Board Committees

Companies fail because of problems at the governance level. Ineffective governance makes
good Boards become bad Boards. Board Committees facilitate good governed Boards to strengthen
further. Professionals in concerned fields can give guidance to committees of the Board. They can
give feasible and genuine suggestions to the Committee, which are incorporated in Committees'
report to the Board of Directors. This helps the Boards of companies to adapt better governance
processes.
Role of Company Secretary in Compliance of CG
In recent years, corporate governance has been become increasingly important, making the
role of the company secretary or pivotal position in the Boardroom. Today, the secretary is often
viewed as the Company's guardian of compliance with the law and best practices. He/she handles
a diversity of tasks that differs significantly from his/her original role of "note taker" at Board
meetings.

Module 5
Corporate Governance – Code & Practices

Government of India appointed several committees from time to time to suggest the
remedial measures to improve governance process committees and their recommendation.

Major Expert committee’s Report of India

1. Confederation of Indian Industries CII a voluntary leading organisation interested in
developing industries in India, gave a desirable Code of Governance in 1998. It released the
Code having nearly 17 recommendations.
2. Kumara Mangalam Birla Committee of SEBI – 1999
The Committee headed by Kumara Mangalam Birla addressed the issues of CG by giving
mandatory and voluntary recommendations for listed companies
3. In 2000, Ministry of Corporate Affairs (MCA) setup a Task Force for Corporate Governance
Department of Corporate Affairs, prepared a report on achieving corporate excellence
through governance
Depending upon the size and capabilities of the companies as well the requirements of the
market place, the task force recommended phased implementations of the essential
measures.
4. In 2000, Insertion of Clause 49 in Listing Agreement
To promote & raise the standard of Corporate Governance Company's Annual Report to
shareholders should contain a Management Discussion and Analysis
5. In 2002, Naresh Chandra Committee on Corporate Audit & Governance Committee
Measure to ensure that management & companies put forth a “truth and fair” statement to
financial affairs of company
6. In 2003, Narayan Murthy Committee was formed (NMC)
To improve the governance standards, to study the role of Independent Directors, Risk
management, Financial Disclosures.
7. In 2003, 2nd Report of Naresh Chandra Committee
The Companies Act, 1956 has undergone many amendments keeping in view the changes in
business environment. As a large no. of private players entering into the market there was
need to look at the law again.
 8. In 2005, J. Irani Committee
Issues arising firm the revision of the Companies Act, 1956. Responses received from various
stakeholders on the Concept Paper, Related Party Transactions.
9. In 2017 Uday Kotak Committee, Recommendations:
Chairman of the board cannot be the MD or the CEO of a company, Board of directors to
have at least one-woman independent director, Board of directors to have a minimum of six
directors

Study of Codes of CG
A Code of Governance is a set of rules decided by an organisation that outline their
company structure, roles and responsibilities of their Board members, Executive Directors and
other Senior Leaders. The code of governance contains guidelines for companies on how to
strengthen their governance. Corporate scandals of various magnitudes have maintained public
and political interest in the regulation of corporate governance worldwide
In India SEBI provides norms through Clause-49 to prepare Codes in listed companies. It is
compulsory for listed companies to comply with the provisions of "Clause-49".

Best Practices of Corporate Governance

Every corporation should follow best practices for corporate governance. Best practices
apply equally to new corporations as they do to well-established ones.
Good corporate governance improves overall performance and promotes trust among
shareholders and other stakeholders.

Specifically, some of the primary best practices include:

1. Competent Board:
Boards should have a composition that incorporates all of the necessary skills and abilities to
make sound decisions for the corporate. Board of directors must have implicit trust in each
other so that board discussions are productive, even when debates are long and wrought
with many strong opinions.
2. Aligning strategies with goal:
Another corporate best practice refers to boards that align their strategies and risk
management activities with the company's goals. Boards should use all of their human
resources and other tools to identify and assess all forms of risk.
3. Accountability:
Accountability has become a strong factor in best practices of corporate governance.
Having reporting systems that are accurate and transparent, and that have a system of
adequate checks and balances, is considered an important part of best practices.
4. High level of Ethics and Integrity:
Directors of the Board must consider their fiduciary duties whenever they speak for their
company. Best directors, from the stand point of good governance, are those having a high
 level of ethics, honesty and integrity in their speech, their works and their relationship with
people.
5. Defining roles and responsibilities:
Another vital aspect of best practices of CG is to separate the roles of the Board's
chairperson and the CEO and to have distinct roles for each of them.
6. Effective Risk Management:
Another best practice of CG is to effectively manage risk arising from cyber security, data
breach, war at pandemic. Besides these risks, companies should regularly identify and
assess the other risks such as financial operational, reputational, environmental, industry-
related and legal risks.

The best practices of CG analysed so far create value for shareholders in terms of profit and
wealth maximization.

Value creation through CG

For companies anywhere in the world, creating long-term shareholder value requires
satisfying other stakeholders as well. Investing for sustainable growth should and often does result
in stronger economies, higher living standards, and more opportunities for individuals. It should
not be surprising, then, that value-creating capitalism has served to catalyse progress, whether by
lifting millions of people out of poverty, contributing to higher literacy rates, or fostering
innovations that improve quality of life and lengthen life expectancy.

Employees
Employees have a direct stake in the company in that they earn an income to support
themselves, along with other benefits. Depending on the nature of the business, employees may
also have a health and safety interest.
Customers
Many would argue that businesses exist to serve their customers. Customers are actually
stakeholders of a business; in that they are impacted by the quality of service/products and their
value
Government
Governments can also be considered a major stakeholder in a business, as they collect taxes
from the company, as well as from all the people it employs and from other spending the company
incurs (sales taxes). Governments benefit from the overall Gross Domestic Product (GDP) that
companies contribute to.
Competitors
For businesses to do well in the market place for the benefit of customers there is the need
for competition between different brands, companies and parties. It gives incentives for self-
improvement. Business parties and competitors must do so in a mutual and fair manner taking into
consideration the welfare of customers.
Society
Communities are major stakeholders in large businesses located in them. They are impacted by a
wide range of things, including job creation, economic development, health, and safety. When a big
company enters or exits a small community, there is an immediate and significant impact on
employment, incomes, and spending in the area.
Corporate Governance Ratings
Corporate governance rating refers to the status of company with respect to adaption of CG
practices.
A corporate governance rating is a final opinion on the importance institutions attach to the
shareholder rights, their public disclosure activities, relationship with stakeholders and the overall
credibility of the board of directors
The contents of a final rating report should be interpreted neither as an offer, solicitation or
advice to buy, sell or hold securities of any company referred to in this report nor as a judgment
about the suitability of that security to the conditions and preferences of investors.
Rating agency may or may not actively conduct an audit of an entity with respect to CG
processes, before rating is given. CG rating being independent on the information provided on a
corporation, it can be modified, suspended or withdrawn, if counter information is provided.

Benefits of CG Rating

• Good CG rating provides better credibility to companies.

• When CG practices are better evaluated and get good credence, the image of the company
boosts in the market.
• Better CG rating facilitate the entity to deal easily with third parties such as creditors,
regulators etc.
• Third party evaluation CG practices will encourage adoption of better governance practices.