Cadbury Committee

In the late 1980 and early 1990s, in lot of scandals and collapses occurred in
the corporate world which led shareholders and banks to worry about their
investments. Several companies such as Polly Peck, British and Commonwealth,
BCCI, and Robert Maxwell’s Mirror Group News International in UK which
experienced explosive growth in earnings ended the decade in a memorably disastrous
manner on account of poorly management business practices. It was in an attempt to
prevent this recurrence of such business failures that the Cadbury Committee under
the Chairmanship of Sir Adrian Cadbury was set up by the London Stock Exchange in
May 1991. The Committee submitted its report and associated ‘Code of Best
Practices’ in December 1992 laying down the methods of governance needed to
achieve a balance between the essential powers of the Board of Directors and their
report accountability.

The Cadbury Code of Best Practices had 19 recommendations. The

recommendations are in the nature of guidelines relating to the BOD, Non-executive
Directors, Executive Directors and those on Reporting and Control.
Recommendations:
A. Board of Directors

 The board should meet regularly, retain full and effective control
over the company and monitor the executive management

 There should be clearly accepted division of responsibilities at the

head of the company, which will ensure balance of power and
authority, such that no individual has unfettered (without any
regulation or control) powers of decision.

 The board should include non-executive directors of sufficient

caliber and number for their views to carry significant weight in the
board’s decision.

 The board should have a formal schedule of matters specifically

reserved to it for decisions to ensure that the direction and control
of the company is firmly in its hands.

 There should be an agreed procedure for Directors in the

furtherance (extension) of their duties to have independent
professional advice, if necessary at the company’s expense.

 All directors should have access to the advice and services of the
CS, who is responsible to the board for ensuring that the board
procedures are followed and that applicable rules and regulations
are compiled with. Any question of the removal of the company
secretary should be a matter to the board as a whole.

B. Non – executive Directors

 They should bring an independent judgement to bear on issues of

strategy, performance, resources, including key appointments, and
standards of conduct.

 The majority of them should be independent of the management

and free from any business or other relationship which could
materially interfere with the exercise of their independent
judgement, apart from their fees and shareholding. Their fees
should reflect the time, which they commit to the company.
  They should be appointed for specified terms and re-appointment
should not be automatic

 They should be selected through a formal process and both, this

process and their appointment should be a matter of the board as a
whole.

C. Executive Directors

 Their service contracts should not exceed three years without

shareholders approval.

 There should be full and clear disclosure of their total

compensation and those of the chairman and the highest paid UK
directors, including pension contributions and stock options.

 Their pay should be subject to the recommendations of a

remuneration committee made up wholly or mainly of non-
executive directors.

D. Reporting and Control

 It is board’s duty to present a balanced and understandable

assessment of the company’s position

 The board should ensure that an objective and professional

relationship is maintained with the auditors

 The board should establish an audit committee of at least three

non-executive directors with written terms of reference, which deal
clearly with its authority and duties.

 The directors should explain their responsibility for preparing the

accounts next to a statement by the auditors about their reporting
responsibilities.

 The directors should report on the effectiveness of the company’s

system of internal control.

 The directors should report that the business is a going concern,

with supporting assumptions or qualifications as necessary.
BIRLA COMMITTEE
1. Board of Directors

There should be a combination of executive and non-executive directors.

The board should consist of not less than 50% of non-executive directors
in case of an executive chairman and not less than 1/3 rd of non-executive
directors in case of non-executive chairman.

2. Audit Committee

 The board should appoint a qualified and independent audit

committee. The committee should have minimum three members
all being non-executive directors with majority being independent
and at least one director having financial and accounting
knowledge.

 The chairman of committee should be an independent director and

should be present at the company’s AGM

 The chairman should invite finance director, head of the internal

audit and representatives of external auditor for committee
meetings. The CS should act as Secretary of the Committee.

3. Powers of Committee

The audit committee should look into the reasons for substantial default
to depositors, creditors, debenture holders and shareholders.

4. Frequency of the meetings and quorum

The committee should meet at least thrice a year, once before finalization
of annual accounts and once compulsorily every 6 months. Quorum
should be either two members or 1/3rd of audit committee, whichever is
higher, and there should be minimum two independent directors.

5. Remuneration of Non-executive Directors

 The board of directors should decide remuneration of non-

executive directors.

 All elements of the package inclusive of salary benefits, bonuses,

stock options, etc., should be disclosed.
 6. Committee membership of directors

Directors should not be members of more than ten committees and

chairman of not more than 5 committees. Directors need to disclose about
their membership with other committees, to the company.

7. Shareholders committee

This committee would be framed to attend to shareholders grievances and

board of directors should delegate power of checking share transfer to
either officer or committee or to Registrar and Share Transfer Agents.
Suggested List of Items to be included in the Report of Corporate Governance

No. Committees/Particulars Description

1 Company’s philosophy A brief statement on code of governance

 Composition
2 BOD  Attendance
 Member/chairman of other committees
 No. of Board meetings and dates
 Terms of reference
3 Audit  Composition
 Meetings and attendance
 Terms of reference
 Composition
4 Remuneration  Attendance
 Policy
 Details of remuneration of all directors
 Name of Non-Exe. Heading the committee
 Name & designation of compliance officer
5 Shareholders  No. of shareholders’ complaints received
 Number no solved to the satisfaction of the
shareholders
 No. of pending complaints
 Location & time
 Details regarding special resolution passed
in previous 3 AGMs
6 General Body Meeting  Person who conducted the postal ballot
exercise
 Proposal of special resolution if any
 Procedure for postal ballot.
 Materially significant party transactions
7 Disclosures which may have potential conflict with
interest of company

8 Means of Communication
General Shareholder
9 
Information
Performance in comparison
to broad-based indices such
10
as BSE Sensex, CRISIL
Index, etc.,
 Accounting treatment, if adopted different –
with explanation
 Non- compliance by company, penalties on
any matter related to capital market during
last 3 years.
 Whistle blower policy
 Half-yearly report to each shareholders
 Quarterly results
 Newspapers – results normally published
 Any website – where displayed
 Official news releases
 Presentation, if any, made to institutional
investors or to any analyst
 AGM – date, time and venue
 Financial calendar
 Date of book closure
Dividend payment date
 Listing on stock exchanges
 Stock code
 Market price data – high, low during each
month.
 Registrar and transfer agent
 Share transfer system
 Distribution of shareholding
 Dematerialization of shares and liquidity
 Outstanding GDRs/ADRs/Warrant or any
convertible instruments, conversion date and
likely impact on equity
 Plant locations
 Address for correspondence
Shri N.R. Narayana Murthy Committee on
Corporate Governance
The Committee on Corporate Governance under the Chairmanship of
Shri N.R. Murthy has suggested some recommendations and salient features of
Revised Clause 49 of the Listing Agreement which are mentioned below:

1. Laying down of tighter qualification criteria for independent directors to

be appointed to the board. It disqualifies material suppliers and
customers, a shareholder with more than 2% stake in the company, a
former executive of the company who left the company less than three
years earlier from being appointed as independent director. A relative of
promoter, or an executive director or a senior executive one level below
an executive director, too cannot be an independent director.

2. The minimum gap between two board meetings has been reduced from
four to three months.

3. It is mandatory for the audit committee meeting, a minimum of four times

in a year with a maximum gap of four months. All members of the
committee should be financially literate and at least one should have
financial or accounting management expertise.

4. The clause recognizes nominee directors of financial institutions as

independent directors.

5. The clause requires the board to lay down a code of conduct for all board
members and the senior management of the company to compulsorily
follow.

6. Where money is raised through public issues, right issues, etc., the
company will have to disclose the uses/application of the funds according
to major categories:

a. Capital expenditure

b. Working capital

c. Marketing costs, etc

7. The company will have to publish in criteria for making the payments to
non-executive directors in its annual report.
The Naresh Chandra Committee
Section 2.3.8 of this report states that the Committee would also recommend
that the following mandatory recommendations in the report of the Naresh
Chandra Committee, relating to corporate governance, be implemented by
SEBI.

This section sets out such recommendations of the Naresh Chandra

Committee that were considered by this committee.

Disclosure of Contigent Liabilities (Section 2.5 of Naresh Chandra

Committee Report)

The committee makes the following mandatory recommendations:

Management should provide a clear description in plain English of each

material contingent liability and its risks, which should be accompanied by the
auditor’s clearly worded comments on the management’s view. This section
should be highlighted in the significant accounting policies and notes on
accounts, as well as the auditor’s report, when necessary.

This is important because investors and shareholders should obtain a clear

view of the company’s contingent liabilities as these may be significant risk
factors that could adversely affect the company’s future financial condition and
result of operations.

CEO/CFO Certification (Section 2.10 of Naresh Chandra Committee

Report)

The committee makes the following mandatory recommendations:

For all listed companies, there should be a certification by the CEO and CFO
which should state that, to the best of their knowledge and belief:

 They have reviewed the Balance Sheet and P & L A/c and all its
schedules and notes on accounts, as well as the cash flow statements and
the Director’s report.

 These statements do not contain any material untrue statement or omit

any material fact nor do they contain statements that might be misleading
 These statements together present a true and fair view of the company,
and are in compliance with the existing accounting standards and/or
applicable laws/regulations

 They are responsible for establishing and maintaining internal controls

and have evaluated the effectiveness of internal control systems of the
company; and they have also disclosed to the auditors and the Audit
Committee, deficiencies in the design or operation of internal controls, if
any, and what they have done or propose to do to rectify these;

 They have also disclosed to the auditors as well as Audit committee,

instances of significant fraud, if any, that involves management or
employees having a significant role in the company’s internal control
systems; and

 They have indicated to the auditors, the Audit committee and in the notes
on accounts, whether or not there were significant changes in internal
control and/or accounting policies during the year.