What is good corporate governance?
Good corporate governance is characterized by a firm commitment and adoption of ethical practices by an organization across its entire value chain and in all of its dealings with a wide group of stakeholders encompassing employees, customers, vendors, regulators and shareholders (including the minority shareholders), in both good and bad times. To achieve this, certain checks and practices need to be whole-heartedly embraced.
Some considerations in this respect are outlined below:
• Codes of conduct and whistle blower policies are important, but more important is how they are communicated and practiced. It is vital for board members and senior management to lead by example
• The concept of having independent directors is a good one in theory but more important is the process underlying selection of
independent directors – is this process rigorous, transparent and objective and is it aligned to the company’s needs?
• It is important to focus on not just earnings but on the sustainability of business models. Focus on not just “How much?”
but on “How?”, “At what cost?” and “At whose expense?”
• Rating agencies need to develop criteria that focus on substance rather than the form of governance
• Compensation of executive directors should flow from an objective performance evalution process conducted by the board
• Greater transparency and disclosure of executive performance criteria are required which should include financial and
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non-financial measures
• Regulators should send clear signals that they shall be proactive in imposing substantial penalties for non-compliance, so
that compliance is strictly adhered to.
ROLE of Comptroller & Auditor General :
– To enhance accountability of the executive to the Parliament and State Legislatures by carrying out audits in the public sector and providing accounting services in the states in accordance with the Constitution of India and Laws as well as best international practices.
– Where entrusted, to provide technical guidance and support to local bodies including Panchayati Raj Institution to enhance their accountability.
The term comptroller evolved in the 15th century through a blend of the Middle English countreroller (someone who checks a copy of a scroll, from the French contreroule “counter-roll, scroll copy”) and the French compte (“an account”), thus creating a title for a compteroller who specializes in checking financial ledgers. This etymology explains why the name is pronounced identically to “controller” despite the unique spelling.
149. Duties and Powers of the Comptroller and Auditor-General – The Comptroller and Auditor-General shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States and of any other authority or body as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, shall perform such duties and exercise such powers in relation to the accounts of the Union and of the States as were conferred on or exercisable by the Auditor-General of India immediately before the commencement of this Constitution in relation to the accounts of the Dominion of India and of the provinces respectively.
The organisations subject to the audit of the Comptroller and Auditor General of India are:-
The Term Paper on American Governmen State Government Man
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• All the Union and State Government departments and offices including the Indian Railways and Posts and Telecommunications.
• About 1500 public commercial enterprises controlled by the Union and State governments, i.e. government companies and corporations.
• Around 400 non-commercial autonomous bodies and authorities owned or controlled by the Union or the States.
• Over 4400 authorities and bodies substantially financed from Union or State revenues
Audit of Government Companies (Commercial Audit)
There is a special arrangement for the audit of companies where the equity participation by Government is 51 percent or more. The primary auditors of these companies are Chartered Accountants, appointed by the Comptroller and Auditor General of India, who gives the directions to the auditors on the manner in which the audit should be conducted by them. The Comptroller and Auditor General of India is also empowered to comment upon the audit reports of the primary auditors. In addition, the Comptroller and Auditor General of India conducts a test audit of the accounts of such companies and reports the results of his audit to Parliament and State Legislatures.
Audit Board Setup in Commercial Audit
A unique feature of the audit conducted by the Indian Audit and Accounts Department is the constitution of Audit Boards for conducting comprehensive audit appraisals of the working of Public Sector Enterprises engaged in diverse sectors of the economy.
These Audit Boards associate with them experts in disciplines relevant to the appraisals. They discuss their findings and conclusions with the managements of the enterprises and their controlling ministries and departments of government to ascertain their view points before finalisation.
The results of such comprehensive appraisals are incorporated by the Comptroller and Auditor General in his reports
Nature of Audit
While fulfilling his Constitutional obligations, the Comptroller & Auditor General examines various aspects of Government expenditure. The audit done by C&A G is broadly classified into Regularity Audit and Performance Audit.
Regularity Audit (Compliance)
• Audit against provision of funds to ascertain whether the moneys shown as expenditure in the Accounts were authorised for the purpose for which they were spent.
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• Audit against rules and regulation to see that the expenditure incurred was in conformity with the laws, rules and regulations framed to regulate the procedure for expending public money.
• Audit of sanctions to expenditure to see that every item of expenditure was done with the approval of the competent authority in the Government for expending the public money.
• Propriety Audit which extends beyond scrutinising the mere formality of expenditure to it wisdom and economy and to bring to light cases of improper expenditure or waste of public money.
• While conducting the audit of receipts of the Central and State Governments, the Comptroller & Auditor General satisfies himself that the rules and procedures ensure that assessment, collection and allocation of revenue are done in accordance with the law and there is no leakage of revenue which legally should come to Government.
Performance Audit
performance audit to see that Government programmes have achieved the desired objectives at lowest cost and given the intended benefits. For a complete list of Performance Appraisals since 1983
Regularity Audit (Financial)
In regularity (financial) audit and in other types of audit when applicable, auditors should analyse the financial statements to establish whether acceptable accounting standards for financial reporting and disclosure are complied with. Analysis of financial statements should be performed to such a degree that a rational basis is obtained to express an opinion on financial statements.
Action on Audit Reports
The scrutiny of the Annual Accounts and the Audit Reports thereon by the Parliament as a whole would be an arduous task, considering their diverse and specialised nature, besides imposing excessive demands on the limited time available to the Parliament for discussion of issues of national importance. Therefore the Parliament and the State Legislatures have, for this purpose, constituted specialized Committees like the Public Accounts Committee (PAC) and the Committee on Public Undertakings (COPU), to which these audit Reports and Annual Accounts automatically stand referred.
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Public Accounts Committee
The Public Accounts Committee satisfies itself:-
a.that the moneys (shown in the accounts) were disbursed legally on the service or purpose to which they were applied.
b.that the expenditure was authorised.
c.that re-appropriation (i.e. distribution of funds.
It is also the duty of the PAC to examine the statement of accounts of autonomous and semi-autonomous bodies, the audit of which is conducted by the Comptroller & Auditor General either under the directions of the President or by a Statute of Parliament.
Committee on Public Undertakings
The Committee on Public Undertakings exercises the same financial control on the public sector undertakings as the Public Accounts Committee exercises over the functioning of the Government Departments. The functions of the Committee are:-
a.to examine the reports and accounts of public undertakings.
b.to examine the reports of the Comptroller & Auditor General on public undertakings.
c.to examine the efficiency of public undertakings and to see whether they are being managed in accordance with sound business principles and prudent commercial practices.
The examination of public enterprises by the Committee takes the form of comprehensive appraisal or evaluation of performance of the undertaking. It involves a thorough examination,including evaluation of the policies, programmes and financial working of the undertaking.
The objective of the Financial Committees, in doing so, is not to focus only on the individual irregularity, but on the defects in the system which led to such irregularity, and the need for correction of such systems and procedures.
CAG’s Role
The Comptroller & Auditor General of India plays a key role in the functioning of the financial committees of Parliament and the State Legislatures. He has come to be recognised as a ‘friend, philosopher and guide’ of the Committee. His Reports generally form the basis of the Committees’ working, although they are not precluded from examining issues not brought out in his Reports. He scrutinises the notes which the Ministries submit to the Committees and helps the Committees to check the correctness submit to the Committees and helps the Committees to check the correctness of facts and figures in their draft reports.
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The Financial Committees present their Report to the Parliament/ State Legislature with their observations and recommendations. The various Ministries / Department of the Government are required to inform the Committees of the action taken by them on the recommendations of the Committees (which are generally accepted) and the Committees present Action Taken Reports to Parliament / Legislature.
In respect of those cases in Audit Reports, which could not be discussed in detail by the Committees, written answers are obtained from the Department / Ministry concerned and are sometimes incorporated in the Reports presented to the Parliament / State Legislature. This ensures that the audit Reports are not taken lightly by the Government, even if the entire report is not deliberated upon by the Committee.
UNION AUDIT REPORTS
The Union Audit Reports of the Comptroller and Auditor General of India, contain the findings of transaction audit and performance audit in the areas of:
• Civil Audit
• Audit of Autonomous Bodies
• Defense Services
• Railways
• Receipts of the Government
• Central Commercial
The Audit of the CAG is bifurcated into two streams namely Performance Audit and Regularity (Compliance) Audit.
While audit of the Civil Departments, Railways and Defense are conducted as per the direct mandate in the constitution and relevant provisions of the DPC Act, the Commercial Audit is conducted under the provisions of Company Act. Autonomous Bodies are audited as per the mandate in the act establishing the body.
The reports of the CAG are deliberated upon by the Public Accounts Committee (PAC) of the parliament, save the commercial reports which are examined by the Committee on Public Undertakings (COPU).
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Responsibility of the Board
Public Sector Companies
Most of the provisions in the Companies Act regarding
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role/responsibility of the Board also apply to the Government
companies. The only exception being Section 297, which states that
the ‘Board’s sanction is required for certain contracts in which
particular directors are interested’.
In addition, the Department of Public Enterprises (DPE) has specified
the following:
1. Board of Directors of all non-financial PSUs should ensure that
decisions regarding investment of funds are transparent and taken
only by the delegated authority, and that the proper exercise of
such authority is monitored by the Board. Boards of all PSUs are
directed to lay down clear policies on investment of surplus funds,
establish transparent procedures, review delegation of authority
and prescribe regular reporting of investments to the Board. The
Administrative Ministry gives guidance to the Board in laying
down policies and procedures. The Administrative Ministry in turn
is guided by the DPE and the Ministry of Finance. The latter
closely follow up the implementation of the policies on investment
laid down by these Ministries.
2. Wherever the company is headed by a part time chairman the part-
time Chairman should guide the board of directors in the discharge
of the role entrusted to them in respect of formulating corporate
policy and the corporate plan, their implementation and evaluation
with a view to improving the enterprise’s performance. The part-
time Chairman, however, cannot issue directives as the
management of public enterprises is vested under the Companies
Act with its Board of Directors.
3. As Chairman of the Board of Directors, the part-time Chairman
will also evaluate the work of the Chief Executive in implementing
the policies laid down by the Board for improving the enterprise’s
performance
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Accountability To Shareholders/ Stakeholders
Public Sector Companies
The board should be accountable to the ultimate owners of the
Government company, which is essentially public and conduct the
affairs of the company in such way that the overall social and not
sectional interests receive the highest priority. The company should
remain viable and meet the objectives for which it has been set up.
Similarly, the interests of the main stakeholders, such as, employees,
creditors, suppliers, customers, environmental impact of the operations
of the company, etc receive due attention
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Access to Information
Public Sector Companies
Often all the required information is not given especially to the non-
government directors. As per DPE guidelines, the part-time Chairman
can call for information, but this should be appropriately done through
the MD and not directly from the officers. The agenda papers for the
Board meeting are provided to all the Directors.
Public Sector Companies
In order to fulfil their responsibilities, board members should have
access to accurate, relevant and timely information. Information
currently volunteered by the management to the board members is
often quite inadequate. This needs to be improved considerably.
Whenever necessary the directors should be free to acquire, at the
expense of the company, independent professional advice in regard to
the matters of the company.
The board meeting should be conducted properly with clearly laid
down agenda for discussion, which should be circulated well in
advance and supported by substantive information. The minutes of the
board meeting should be circulated well in advance of the next board
meeting. This should be a mandatory recommendation for all
companies
Election
Public Sector Companies
Section 255, 256, 257 and 269 of the Companies Act do not apply to a
Government company in which entire paid-up share capital is held by
Central/State Government or subsidiary of a Government company in
which entire paid-up capital is held by that Government company.
These Sections stipulate:
At least 2/3rd
of total directors should retire by rotation at AGM.
Remaining 1/3rd
may be appointed for life-term or for a fixed duration
in the general meeting. At every AGM, 1/3 rd
of those liable to retire by
rotation shall retire from office. A retiring director may be re-
appointed at AGM. (S.255,256)
The appointment of managing director or whole-time director or
manager requires Central Government approval only in certain cases.
(S.269)
The DPE guidelines stipulate the following:
All part-time non-official directors are appointed for a term of three
years at a time with rotational retirement. The retiring directors are
eligible for re-appointment.
Rotational retirement is necessary to ensure a degree of continuity of
the Board. For the purpose of rotational retirement the public
enterprises fall in two categories, namely, (i) enterprises where the
entire paid up share capital is held by the Government (including State
Governments), and (ii) the entire paid up capital is not held by the
Government. Ideally in both cases rotational retirement system should
be adopted in both cases.
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Selection Process
All proposals relating to creation/redesignation/upgradation of board
level posts, including MD, Chairman, CMD, etc. in PSEs require the
approval of the Financial Adviser and Minister-in-Charge of the
Administrative Ministry. The proposals are then processed by the DPE
in consultation with the Public enterprises Services Board (PESB) for
approval of the Ministry of Heavy and Public Enterprises and the
Ministry of Finance.
ISSUES / RECOMMENDATIONS
Public Sector Companies
The concept of nomination committee of the Board does not exist in
the Government companies at present. The selection for all Board-
level posts in PSEs is done through a complicated process. The role of
Public Enterprises Services Board (PESB) set up by the Board comes
close to that of the nomination committee. It advises Government on
the appointments to all top-level posts in PSEs. As the entire process is
very complicated and involves different levels of recommendations,
interviewing and final decision-making, there are considerable delays
in appointment to various top-level posts.
An independent high powered Selection Board of eminent persons on
the lines of the Union Public Service Commission to select full time
directors for the PSUs should be set up. Its decisions should be final
and not subject to approval of the concerned administrative ministry.
The selection board should also prepare a panel of experts for
nomination as independent or professional directors on the boards of
PSUs. The induction of non-executive directors should be done by a
nomination committee.
The criteria for choosing independent non-executive directors should
be disclosed in the Annual Report
Size
Public Sector Companies
Sections 252, 253, 258 of the Companies Act regarding size of the
board apply to Government companies also.
Section 259 of the Companies Act, which stipulates that any increase
in the number of directors beyond 12 requires Central Government
approval, does not apply to Government companies.
ISSUES / RECOMMENDATIONS
Public Sector Companies
The Articles/Memorandum of Association of different PSEs specify
the size of the board, which varies from company to company.
Normally, the size of the Board ranges between 3 and 15. Some PSUs
have even bigger boards.
The recommendation that all listed companies should have minimum
of 10 board members should apply to PSEs as well.
Composition
Public Sector Companies
The Members of the Board of PSEs generally consist of the following
three categories:
Functional Directors: These are full time operational Directors
responsible for day to day functioning of the enterprise. The
enterprises could have representation at Board level for disciplines,
such as, finance, personnel, production, marketing, project, planning
etc. The number of such should not exceed 50% of the actual strength
of the board.
Government Directors: They are appointed by the Administrative
Ministries and are generally the officers dealing with the concerned
enterprise. In most cases there are two such Directors on a Board; the
Joint Secretary or Additional Secretary dealing with particular
enterprise and the Financial Adviser of the Ministry. The number of
government directors should not exceed one-sixth of the actual
strength of the board with a limit of two.
Non-Official Directors: The induction of non-official Directors on the
Boards of PSEs is considered essential in order to make the Boards
more professional. They are drawn from the public men, technocrats,
management experts and consultants, and professional managers in
industry and trade with a high degree of proven ability.
The number of Non-Official Part-time Directors on a Board should be
at least one-third of its actual strength.
ISSUES / RECOMMENDATIONS
Public Sector Companies
The boards of PSEs should have core group of well
qualified/experienced professional non-executive directors who are
truly independen
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Independence
Public Sector Companies
▪ The concept of independence of directors does not appear to have
found its place in the existing Government guidelines.
Public Sector Companies
▪ The definition of independence to be followed by all companies,
including banks and public sector companies, should be the definition
recommended by the Blue Ribbon Committee in the context of the
audit committees, which is as follows:
▪ “Members … shall be considered independent if they have no
relationship to the corporation that may interfere with the exercise of
their independence from management and the corporation.
▪ Examples of such relationships include:
▪ A director being employed by the corporation or any of its affiliates
for the current year or any of the past five years;
▪ A director accepting any compensation from the corporation or any of
its affiliates other than compensation for board service or benefits
under a tax-qualified retirement plan;
▪ A director being a member of the immediate family of an individual
who is, or has been in any of the past five years, employed by the
corporation or any of its affiliates as an executive officer;
▪ A director being a partner in, or a controlling shareholder or an
executive officer of, any for-profit business organisation to which the
corporation made, or from which the corporation received, payments
that are or have been significant to the corporation or business
organisation in any of the past five years;
▪ A director being employed as an executive of another company where
any of the corporation’s executives serves that company’s
compensation committee.”
In the Indian context the directors nominated by the government on the
boards of PSUs and PSBs and all nominees of the regulators should not be
considered as independent.
A majority of non-executive directors should be independent of
management and free from any business or other relationship that could
interfere with their independent judgement; they should be identified in
the annual report.
Multiple Board Seats
Public Sector Companies
As per the Companies Act, Directors are required to disclose other
directorships, the total number of which should not be more than 15
companies. (S. 275)
Section 316 of the Companies Act, which stipulates that the Board
may appoint a person Managing Director in more than one company,
subject to passing of unanimous resolution, does not apply to a
Government company where entire paid-up capital is held by
Central/State Government. A full-time Director can hold post in only
one PSE.
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Chairman and CEO
Public Sector Companies
As per DPE Guidelines, the Board of PSE should normally be headed
by a single Chairman-cum-Managing Director. This post should not be
kept vacant for very long. The temporary vacancies of Chairman and
Managing Directors of PSEs can be filled in by giving officiating
charge to the senior most Functional Director on the Board of the
concerned enterprise.
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Public Sector Companies
Section 619 of the Companies Act lays down the procedure for the
audit of accounts of govt. companies. Sec. 224 to 233 of the Cos. Act,
which deal with appointment and remuneration of auditors, resolution
for appointing/removing auditors, qualification/ disqualification of
auditors, powers/duties of auditors and signing of audit report, etc., do
not apply to govt. companies.
The auditor of a govt. company is appointed by the Central
Government on the advice of the Comptroller and Auditor General of
India (CAG), who directs the manner in which the accounts of
government companies shall be audited. The audit report is submitted
to the CAG, who comments upon or supplements the auditor’s report.
The comments of the CAG along with the audit report are placed
before the AGM of the company.
In particular, the following points must be incorporated:
▪ Audit Committees play an important role in the larger governance
process through oversight of financial reporting. A proper and well
functioning system exists when the three main groups responsible for
financial reporting—the full board including the audit committee,
financial management including the internal auditors, and the outside
auditors—form a “three-legged stool” that supports responsible
financial disclosure and active and participatory oversight. The audit
committee is an extension of the full board and hence the ultimate
monitor of the process.
▪ The following definition of independence for purposes of service on
the audit committee of listed companies must be adopted. Members of
the audit committee shall be considered independent if they have no
relationship to the corporation that may interfere with the exercise of
their independence from management and the corporation.
▪ The audit committees to be comprised solely of independent directors.
▪ The audit committees to be comprised of a minimum of three
directors, each of whom is financially literate or becomes financially
literate within a reasonable period of time. Further, at least one
member of the audit committee should have accounting or related
financial management expertise.
▪ The audit committee of the company should (i) adopt a formal written
charter that is approved by the full board of directors and that specifies
the scope of the committee’s responsibilities, and how it carries out
those responsibilities, including structure, processes, and membership
requirements, and (ii) review and reassess the adequacy of the audit
committee charter on an annual basis.
▪ The audit committee to disclose in the company’s proxy statement for
its annual meeting of shareholders whether it has adopted a formal
written charter, and, if so, whether the audit committee satisfied its
responsibilities during the prior year in compliance with its charter.
▪ The audit committee charter should specify that the audit committee is
responsible for ensuring its receipt from the outside auditors of a
formal written statement delineating all relationships between the
auditor and the company.
▪ Generally Accepted Accounting Standards (GAAS) require that a
company’s outside auditor discuss with the audit committee the
auditor’s judgements about the quality, not just the acceptability, of the
company’s accounting principles as applied in its financial reporting.
▪ All reporting companies to include a letter from the audit committee in
the company’s annual report disclosing whether or not (I) management
has reviewed the audited financial statements with the audit
committee, (ii) the outside auditors have discussed with the audit
committee the outside auditors’ judgements of the quality of
accounting principles, (iii) the members of the audit committee have
discussed among themselves the information disclosed to the audit
committee, and (iv) the audit committee believes that the company’s
financial statements are fairly presented in conformity with GAAP in
all material respects.
The audit committees should not function merely as super inspection
departments of banks as they are doing currently. They should
basically provide oversight of the bank’s internal and external auditors,
approving their appointment and dismissal, reviewing and approving
audit scope and frequency, receiving their reports and ensuring that
management is taking appropriate corrective actions in a timely
manner to address control weaknesses, non-compliance with policies,
laws and regulations, and other problems identified by auditors.
The Government companies follow a very different procedure for audit
at present. The audit is conducted as per the procedure laid down by
the Comptroller and Auditor General of India (CAG).
It is desirable
that the audit committees should be formed in Government companies
as per the recommendations of the Blue Ribbon Committee to perform
a distinct role. The role of CAG and audit committees should not be
mixed up as CAG looks at audit from propriety angle
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Public Sector Companies
Regarding nominee Directors, the DPE Guidelines stipulate the
following:
The prime duties of a Government nominee on the Board of Directors
of a PSU are to safeguard the interest of the shareholders, contribute to
the efficient functioning of the PSUs and report back the same
regularly to the Government. The concerned Administrative Ministry
is required to ensure that the nominee Directors comply with the
responsibility cast on them.
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Remuneration Level and Composition of Remuneration
Public Sector Companies
Sections 198 and 309 of the Companies Act, which deal with
remuneration payable by a company, do not apply to Government
companies. The remuneration for all board level posts in PSEs is fixed
by the Government at a gap of every five years.
The part-time Chairman is paid either a fixed monthly honorarium or
sitting fee and incidentals subject to a maximum of Rs. 1000/-p.m.
They are also entitled to travelling allowance, accommodation,
medical benefits, company car, telephone and secretariat assistance as
admissible to highest grade officer of the company. This is not
applicable to a serving Government officer functioning as part-time
Chairman.
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Evaluation of Governance Disclosures
Public Sector Companies
Shareholders have a right to receive copies of balance sheet and
auditors’ report. (S.219)
The balance sheet and profit and loss account should give true and fair
view of the state of affairs of the company.(S.211)
Under the provisions of the Listing Agreement, all listed companies
are required to make detailed disclosures.
The companies are legally bound to make timely disclosure of material
and price sensitive information including material events having a
bearing on the performance of the company to every stock exchange
where they are listed and to the regulators.
