Companies Act 2013: Keeping pace with Board Governance Evolution

Transcription

1 Companies Act 2013: Keeping pace with Board Governance Evolution

2 Adapting to the new landscape The Companies Act, 2013 clearly indicates focus of regulators toward enhancing the responsibility and accountability of boards. The Act outlines various requirements for Governance, disclosures and enhanced roles, responsibilities and liabilities of the board, its committees and independent directors. Section 166 of the Act, outlines the Duties of Directors as under: A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This leaves no doubt in terms of the allencompassing ambit of oversight mandated and hence, requires a concerted effort toward implementation of a mechanism to ensure that the responsibilities entrusted are discharged effectively. Board Talk Emerging Concerns What exposure do I have as an independent director on the board? What can I be held accountable for? What should I have in my contract to protect my interest and exposure? Can I be insured for my exposure? What are the options available? Do I have adequate time on hand to do justice to all the responsibilities entrusted to me? Do I understand the business dynamics and underlying financial flows really well? Do I get the right information, at the right time to get in to sufficient level of detail? In the absence of any private sessions with external and internal auditors as well as any other consultants, am I just relying on management s perspective? Where do I draw a line between management s responsibility and that of a board or any of board s committees? Are the agenda, charter and the focus of the board and its committee s aligned with what leading boards do? How can I access that? Am I adequately prepared to discharge the responsibilities entrusted upon me? 2 Companies Act

3 Board Governance Key Requirements Board Of Directors Key Requirements Constitute the Board of Directors Atleast 1/3rd of the Directors in the Board to be Independent Directors Minimum one director who stayed in India for more than 182 days in the previous calendar year One Director may be appointed by the small shareholders 2 Atleast one Director to be a Woman Director Committees to be Constituted by the Board Board of Directors to constitute an Audit Committee (consisting of minimum three directors with majority being independent directors) Terms of reference for the Audit Committee to be specified by Board in writing Majority members of Audit Committee (including the Chairperson) to be able to read and understand financial statements Vigil mechanism to be established and to be operated by the Audit Committee, where Audit Committee exists Board of Directors to constitute a Nomination and Remuneration Committee (NRC) consisting of minimum three nonexecutive Directors of which more than 50% should be Independent Directors Board of Directors to constitute a Stakeholders Relationship Committee consisting of a nonexecutive Director as a Chairperson and other members as the Board may decide Applicability Public Private Listed (1) 149(4) 149(3) 151 Relevant Section 149(1) Rule (1) Rule (4) 177(2) 3 177(10) Rule (1) Rule (5) 1 Paid up share capital > INR 100 crores or outstanding loans or borrowings or debentures or deposits > INR 200 crores 2 Small shareholder = shareholder holding shares of nominal value of not more than INR 20,000 3 If accepting deposits from Public or have borrowed from banks and public financial institutions in excess of INR 50 crores 4 more than one thousand shareholders, debentureholders, depositholders and any other security holders at any time during a financial year

4 Key Requirements Applicability Public Relevant Section Private Listed Requirements for Independent Directors Roles, responsibilities and duties 4 Schedule IV Selection of Independent Directors 4 Section Rules under Chapter XI Performance evaluation of the Board 4 Schedule IV Performance evaluation of Board members evaluation of nonindependent and Independent Directors Training of Independent Directors 4 Schedule IV Guidelines on remuneration of board members Section 178 and Section 197 Qualification of Independent Directors Enhancing Board Effectiveness Section 178 and Schedule IV Disclosures by the Board Disclosures to be made as part of Board Report (Extract of annual return, policy on appointment and remuneration of Directors, comments on qualifications, contracts with related parties, formal evaluation of Board performance, etc.) 134(3) Schedule V Part II Section IV Note: The above list if prepared for a quick and easy understanding of the requirements. Please go through the relevant section and the corresponding rules for a detailed understanding of the requirements. more than one thousand shareholders, debentureholders, depositholders and any other security holders at any time during a financial year 4 4 Companies Act

5 Questions to be considered Are we aligned as per the requirements and is the composition effective? Is the composition and size of the Board and its committees aligned to the requirements under the Companies Act 2013? Do we have the right mix of skills, knowledge and familiarity with the company that is required for effective functioning of the Board? Do we have complete understanding of our roles, responsibilities and powers and the associated risk/exposure we are accepting? Well prepared Requires consideration Are we aware of the individual responsibilities and powers entrusted under the Act, including the consequences and exposure (personal and company) in case of noncompliance? Are we confident that we have a comprehensive understanding of the financial statements and have drawn the right conclusions? Have we considered all the information provided adequately? Are we asking all the right questions and happy with the responses we are getting? Is there a process for orienting the Board and Committee members on their responsibilities? Do we have a complete understanding of the Business and its functioning? What can I do to better understand the internal control environment and any potential red flags with respect to potential frauds? Do we as a Board consult with the relevant experts to understand the issues and get an independent perspective? Have we managed our risk/exposure through a structured mechanism/framework? Are we sure that disclosures made by us in Directors Report are complete, accurate and relevant? How do we ensure management is reporting all the relevant aspects to be considered for the disclosures? Do we have an adequate framework enabling us to sign off on critical aspects of internal financial controls, fraud reporting, risk management, compliance, etc.? How do we demonstrate compliance to qualitative criteria specified in the Companies Act 2013 (especially related to qualifications, skills of Directors and Independent Directors)? Have we mandated and institutionalized frameworks required under the Act (Vigil Mechanism, Risk management, Compliance, etc.), along with detailed policies, procedures and responsibilities for administering the same? Measure our effectiveness/performance? How do we ensure continuous improvement? Do we have a framework for evaluating performance of key managerial personnel (KMP)? Is there a process of identifying successors for KMPs? How do we measure if we are discharging all the responsibilities effectively? Do we have a framework for continuous improvement? Are we aligned with the leading Boards globally? Is the remuneration of Board members aligned to their individual performance, overall Board performance and the organizations performance?

6 How Can EY Help You Meet the Board Governance Challenges Suggested Action Assistance from EY Do I need support? 1. Board Navigation sessions Understand the changes and ensure alignment with the requirements Navigate through the requirements: Board Orientation sessions Opportunity for Board Members and Independent Directors to have focussed sessions to gain understanding of the requirements under the provisions of the Companies Act 2013 and resultant potential implications Assess readiness and prepare implementation roadmap: Blueprint for Board Compliance Assess the current state as compared to the requirements under the Companies Act 2013 and define an implementation roadmap for aligning with the requirements (along with timeline and responsibilities) 2. Directors toolkit Ensure clarity and uniform understanding of individual roles, responsibilities and powers Define a standard toolkit: Directors Induction toolkit Standard induction toolkit for new directors, including key aspects related to the following: Understanding of the relevant Industry/Business and its associated challenges Independent Director and Companies Act (Definition, responsibilities, etc.) Alignment of statutory roles and responsibilities with the individual contract and the Company/companydefined charters Individual risk exposures in the event of potential noncompliances Oversight role (Compliance, risk management, Internal Financial Controls, Related Party, Corporate Social Responsibility, etc.) Essential tools (Guidance on disclosures, Letter of appointment, etc.) Define training framework: Process of conducting periodic/need based orientation sessions on key aspects stated above Define relevant procedures and framework to ensure sustenance and adherence 3. Board Handbook Create a Board reference manual, including the following: Board Handbook Board Governance manual: Including Charters, contract templates and procedural aspects based on requirements of the Companies Act 2013 including detailed procedures regarding appointment and selection of Directors, Independent Directors and other committee members Reporting Protocols: Information to be reported Manner and timing of reporting Management responsibility for reporting Templates for reporting Capturing actions and monitoring them Disclosure framework: Framework to capture the relevant aspects along with the appropriate checks and balances to ensure completeness, accuracy, relevance, etc. of the disclosures being made 6 Companies Act

7 How Can EY Help You Meet the Board Governance Challenges Suggested Action Assistance from EY Do I need support? 4. Board Evaluation toolkit Create a framework for evaluation Create Board Evaluation Toolkit: Board Evaluation Framework Institute a mechanism (self, survey, interview, etc.) for performance evaluation and capturing the relevant action/decisions Define and formalize metrics for evaluation of the Board, Audit Committee, as well as individual Board members Develop Board succession and reward management framework: Develop succession planning mechanism for managing director, executive directors, CEO and other key managerial personnel Develop reward mechanisms for the Board members Define framework to remain effective and align with the leading practices 5. Board Effectiveness Programme Institutionalize improvement program: Board effectiveness program Benchmark maturity level compared to leading practices and implement measures for enhancing effectiveness of the Board performance Benchmark with global governance frameworks and adopt measures to enhance level of Governance Notes

8 EY offices Ahmedabad 2 nd floor, Shivalik Ishaan Near C.N. Vidhyalaya Ambawadi Ahmedabad Tel: Fax: Bengaluru 12 th & 13 th floor UB City, Canberra Block No.24 Vittal Mallya Road Bengaluru Tel: Fax: (12 th floor) Fax: (13 th floor) 1st Floor, Prestige Emerald No. 4, Madras Bank Road Lavelle Road Junction Bengaluru Tel: Fax: Chandigarh 1 st Floor, SCO: Sector 9C, Madhya Marg Chandigarh Tel: Fax: Chennai Tidel Park, 6 th & 7 th Floor A Block (Module 601,701702) No.4, Rajiv Gandhi Salai, Taramani Chennai Tel: Fax: Hyderabad Oval Office, 18, ilabs Centre Hitech City, Madhapur Hyderabad Tel: Fax: Kochi 9 th Floor, ABAD Nucleus NH49, Maradu PO Kochi Tel: Fax: Kolkata 22 Camac Street 3 rd floor, Block C Kolkata Tel: Fax: Mumbai 14 th Floor, The Ruby 29 Senapati Bapat Marg Dadar (W), Mumbai Tel: Fax: th Floor, Block B2 Nirlon Knowledge Park Off. Western Express Highway Goregaon (E) Mumbai Tel: Fax: NCR Golf View Corporate Tower B Near DLF Golf Course Sector 42 Gurgaon Tel: Fax: th floor, HT House 1820 Kasturba Gandhi Marg New Delhi Tel: Fax: th & 5 th Floor, Plot No 2B, Tower 2, Sector 126, NOIDA Gautam Budh Nagar, U.P. India Tel: Fax: Pune C401, 4 th floor Panchshil Tech Park Yerwada (Near Don Bosco School) Pune Tel: Fax: Ernst & Young LLP EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata Ernst & Young LLP. Published in India. All Rights Reserved. EYIN ED None This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. For any queries on how EY can assist you: Please contact, boardgovernance@in.ey.com 8 Companies Act