Corporate Boards, Committees and Policies under Companies Act, By Vinod Kothari 2015

Transcription

1 Corporate Boards, Committees and Policies under Companies Act, 2013 By Vinod Kothari 2015

2 Table of Contents Chapter 1: The board as the key element in corporate governance: global principles 14 Key to board responsibilities: separation of ownership and management Manner of functioning of the board: Board structures: unitary and two-tier boards: Chairman, CEO and the managing director: Board effectiveness and principles of corporate governance: Role of different directors: Role of the Chairman: Role of senior independent director: Role of executive directors: Role of the CEO: Role of non-executive directors: Board support and the role of the company secretary: Effective decision-making: Board composition and succession planning: Evaluating board performance: Audit, risk and remuneration committees: Communication with shareholders; Annexure 1: provisions of Companies Act, 2013 applicable to the CEO Chapter 2: Corporate Boards under Companies Act, Highlights of provisions of the Companies Act 2013 pertaining to board of directors: Independent directors and nominee directors: Duties of directors: Vacation of office and resignation of directors: Vigil mechanism: Directors interests and related party contracts Restraints on board powers: Prohibition on lending to directors or directors entities: Restrictions on loans and investments: Option contracts in securities: Insider trading prohibition: Essential statutory rules about corporate boards: Rotational and non-rotational directors: Other rules on Composition of Board of Directors... 48

3 Committees of Board Chapter 3: Global trends in corporate boards Classification of industries: Most desired skills & experience needed for Board s success: Key Boardroom issues Board Selection, Recruitment and Composition Board leadership Risk Management CEO Succession Planning Cyber Security Board priorities in Chapter 4 : Functions of Board Manner of functioning by the board Board meetings versus circular resolutions: Powers of Board: Section Restrictions on the powers of Board: Section Responsibilities of Board of Directors Disclosures by Board of Directors Conclusion Annexure 1: Powers of the board requiring unanimous sanction Annexure 2: Powers of the Board which can be exercised only at a meeting of the Board under Companies Act Chapter 5: Legal position of directors Director as an agent Duty of care and skill: Director as a trustee: Director as an officer Directors as employees of the company: Legal position of the managing director: Implicit and explicit powers of the managing director Annexure: Explicit powers of the managing director Chapter 6 : Duties of directors Precedents around the world United Kingdom Australia Duties of Directors... 83

4 Duties of directors in general: General Duties: Under Act Fiduciary duties of directors: some recent judicial trends: Conclusion Chapter 7 : Liabilities of directors General principles pertaining to directors liability: Do different categories of directors have different liabilities? Independent directors as officer in default under the Companies Act, MCA Circular and its implications Scope of the immunity under the Companies Act, Sweep of the provision: Persons immune: Act of omission or commission by the company Key elements restricting immunity: Liability under the Listing Agreement Judicial views and observations on liability of non-executive directors The ruling in Newcastle: indicating a new trend in liabilities of non-executive directors: Facts of the case: Role of remuneration committee: Liabilities of independent directors: Higgs Committee: Managing the liability of directors: Prevention is better than cure Indemnification from the company Directors & Officers Liability (D & O) Insurance Relief from the Court Conclusion Chapter 8: Meetings of the Board Essentials of board meetings: Provisions about board meetings in other countries: United Kingdom Australia Provisions of the Act Board Meetings: Section Quorum for meetings of Board: Section Passing of resolution by circulation: Section

5 Proceedings of Board meetings: Section Conclusion Chapter 9: Holding board and committee meetings by audio-visual mode Legal provisions about board and committee meetings using VC facility: Participating through VC and meeting held through VC: Pre-requisites of holding meeting vide VC or AV mode Procedure for holding meeting vide VC/AV Activities before the meeting Activities at the meeting Activities after the meeting Compliance by the Chairperson Compliances by a Company Secretary (CS) Compliance by director participating vide VC/AV Intent of listing matters excluded in a VC-enabled meeting: Can a director participate through VC, and his presence not counted? FAQs on VC/AV mode Performance Evaluation of the Board, its Committees and Individual Directors. 121 History of formal performance evaluation systems Precedents around the world United States United Kingdom Singapore Applicability of requirement to conduct performance evaluation Provisions under Act, Section 134 of Act, Section 178 of Act, Schedule IV of Act, Equity Listing Agreement Periodicity Some examples of performance evaluation reports of leading companies: Wipro Limited Unilever PLC Vodafone PLC Weir Group PLC Tesco PLC Cairn Energy PLC Glaxosmithkline PLC

6 Barclays PLC Reckitt Benckiser PLC Types of evaluation Performance evaluation of Executive Directors Role of External facilitator Use of Technology Evaluation checklists Annexure-1: Board evaluation checklist Pre Evaluation requirements Performance Evaluation of the Board Performance Evaluation of the Chairman (to be done only by an independent director) Performance Evaluation of the CEO Performance Evaluation of Board Committees Performance Evaluation of Individual Director General Parameters for both independent and non-independent directors Performance Evaluation of Independent Directors Specific Parameters. 143 Chapter 10: Familiarisation Program for Independent Directors Report of the Cadbury Committee The Committee on Corporate Governance: Hampel Committee: Global Provisions about directors training United Kingdom Singapore Hong Kong Applicability of requirement to training of directors or familiarization programme Provisions under Act, Schedule IV of Act, Equity Listing Agreement Role of External facilitator Contents of familiarization programme Chapter 11: Separate meeting of Independent Directors under Companies Act, Relevance of Information Flow of Information Quantity of Information Whether statutory matters are being place before the Board?

7 Whether matters other than statutory matters are brought before the Board? Quality of Information Timeliness of flow of information Conclusion Chapter 12: Evaluation of adequacy and effectiveness of Internal Control Systems 159 The concept of internal control Internal Control and element of Risk Internal control under Act, 2013 and Equity Listing Agreement Section 134(5)(e) of Act, Section 177 of Act, Equity Listing Agreement Whether internal controls or internal financial controls are the same? Checklist for internal financial control: Chapter 13 : The Nomination and Remuneration Committee : An International Comparison Global comparison on essential of nomination committee: Difference in roles and responsibilities of NRC Role of Nomination / Corporate Governance Committee Remuneration / Compensation Committee Appointment of senior managerial personnel: is the power reserved with the NRC? Corporate governance committee and appointment of senior management: global practices United States United Kingdom Analysis of the above Chapter 14: Remuneration policy: Annexure: Model Remuneration Policy Interpretation Clauses Effective Date Scope Purpose Guiding Principles for Remuneration and Other Terms of Employment Responsibilities and Powers of the Committee Principles for Selection of Independent Directors Overall Criteria for Selection of Executives General Policies for Remuneration

8 Notice of Termination and Severance Pay Policy Disclosure and Dissemination Chapter 15 : The Audit Committee Provisions relating to Audit Committees under CA, Applicability of Audit Committee requirement: Composition of Audit Committee Reconstitution of Audit Committee Functions of Audit Committee Appointment of auditors: Review of independence and performance of the auditor: Examination of financial statement and the auditors report Approval of transactions with related parties: Omnibus approvals to related party transactions: Basis of approval of related party transactions by the audit committee: Scrutiny of intercorporate loans and investments: Valuation of assets or undertakings where necessary: Evaluation of internal financial control: Evaluation of risk management systems: Powers of Audit Committee Establishment of Vigil Mechanism Provisions under Listing Agreement pertaining to audit committee: Applicability Composition of Audit Committee Meeting of Audit Committee Functions of Audit Committee Powers of Audit Committee Audit Committee and Related Party Transactions under Listing Agreement Annexure 1: Sample Audit Committee Charter Annexure 2: Checkpoints for determination and approval of related party transactions at arm s length basis Annexure 3: Audit Committee review criteria Auditor s Independence and Effectiveness Purpose On Auditor Independence On Audit Process and its effectiveness Chapter 16: Board and Audit Committee Review Criteria Risk Management Systems

9 Purpose of risk management: Meaning of risk management: Categories of risks: Based on place of origin: Categories based on type of risk: Strategic Risks Financial Risks Compliance Risks Operational Risks Parameters for review of risk management: Chapter 17: Omnibus approval of related party transactions Chapter 18: Policy for Determining Material Subsidiaries Draft of policy for material subsidiaries: Commencement: Objective: Definitions Interpretation: Process of determination and compliances in respect of Material Subsidiaries 243 General Compliances in respect of other Subsidiaries Amendments: Chapter 19: Policy on board diversity: Sample Policy on Board Diversity Purpose Policy Statement Role of the Nomination and Remuneration Committee Review of the Policy Chapter 20: Policy on related party transactions Policy on Related Party Transactions Effective Date Purpose Definitions Policy Statement A. Identification of Related Parties B. Procedures for review and approval of Related Party Transactions C. Standards for Review D. Determination of Ordinary Course of Business

10 E. Determination of Arms length nature of the Related Party Transaction F. Disclosures Chapter 21: Succession planning Succession Planning of [ ] for Appointments to the Board and Senior Management of the Company Purpose Scope Interpretations Modes for succession Identification and development of Internal Candidates I. Identification II. Training and development Identification of external candidates Procedure for succession A. In case of temporary vacancy caused due to illness or leave of absence 262 B. In case of foreseeable vacancy such as retirement or removal C. In case of unforeseeable vacancy caused due to resignation, death or otherwise Administration and review Chapter 22: Corporate Social Responsibility Provisions, Functions and Policies Role of the board once a company is covered by section CSR Committee Composition and constitution Meetings of CSR Committee Quorum for CSR Committee CSR Committee - roles and responsibility CSR activities Collaborative effort CSR activities as per Schedule VII CSR Expenditure CSR policy Contents Annexure : Sample CSR policy Draft of CSR Policy ANNEXURE

11 List of activities that may be taken up by the Company as their Priority Projects Chapter 23: Vigil Mechanism Whistle blowing internationally and in India What is voicing of genuine concern? Vigil mechanism for closely held companies Annexure: Draft Vigil Mechanism Policy Background Interpretations Policy Objectives Scope of the Policy Receipt and Disposal of Protected Disclosures Investigation Decision and Reporting Secrecy / Confidentiality Protection Access to Chairman of the Audit Committee Communication Retention Of Documents Administration and Review of the Policy Amendment Chpater 24: Contents of the board report Disclosures to be made by every company Disclosures by public companies or companies triggering specified limits Trigger based disclosures: Additional disclosures for listed companies and class of companies Chapter 25 : Guide to Directors Responsibility Statement Adherence to Accounting Standards: Accounting policies and reliance on judgments and estimates: Safeguarding the company s assets and prevention of fraud and error: Going concern accounting: Adequacy of internal financial controls: Compliance with applicable laws: Chapter 26: Board Governance in Financial Institutions: Banks, NBFCs and Insurance Companies Need for good corporate governance in the financial sector Corporate governance norms for the financial intermediaries

12 Corporate governance norms for Banks Norms for PSU Banks Norms for Private Banks Composition of the board Audit Committee Other Committees of board Corporate governance norms for Non Banking Financial Companies (NBFCs) Constitution of Audit Committee Constitution of Nomination Committee Constitution of the Risk Management Committee Disclosures and transparency Rotation of partners of the statutory auditors audit firm Revised regulatory framework for NBFCs Corporate governance norms for Insurance Companies Composition of the board Roles and responsibilities of the board Fit and proper criteria of the directors Committees of board Other provisions