Case Studies with lessons learned on Corporate Social Responsibility And Governance
Securities Exchange Commission, USA,
in a recent case has begun a new era of scrutinizing liability of independent
directors by bringing an action against independent director. In SEC v. Raval,
Civil Action No. 8:10-cv-00101 (D.Neb. filed Mar.15,2010) it was alleged that
Vasant Raval, former Chairman of the Audit Committee of Info Group Inc.(now
Info USA, Inc.) had failed to sufficiently investigate certain "red
flags" surrounding the company's former CEO and Chairman of the Board,
Vinod Gupta.
The SEC's complaint alleged that
Vasant Raval 70, resident of Nebraska, served on the board of directors for Info
Group in various positions from 2003 to 2008, including a stint as Chairman of
the Audit Committee. During this period, Raval allegedly turned a blind eye to
allegations that Vinod Gupta directed the company to improperly pay himself
$9.5 million that he then spent on corporate jets, service for his yacht, life
insurance premiums, and payment of personal credit cards. In addition, the
complaint alleged that Gupta directed the company to enter into related party
transactions totaling approximately $9.3 million with entities that he
controlled or with whom he was affiliated viz. Annapurna Corporation (now
Everest Corporation), Aspen Leasing Services, LLC ("Aspen Leasing").
These related party transactions were not disclosed in the company's public
filings.
The Commission also alleged that
Raval failed to respond appropriately to various red flags concerning Gupta's
expenses and Info's related party transactions with Gupta's entities. Acco
rding to the complaint, Raval failed to take appropriate action regarding the
concerns expressed to him by two internal auditors of Infogroup Inc., that
Gupta was submitting requests for reimbursement of personal expenses. In a
board meeting, Raval was tasked with investigating the propriety of the
transactions. Rather than seeking assistance from outside counsel or rigorously
scrutinizing the transactions, Raval began his "in depth
investigation" and presented a report to the company's board merely in 12
days. The "Raval Report" however, omitted critical facts.
Despite numerous prompts by internal
auditor, Raval failed to undertake a thorough investigation. As a result, the
company allegedly failed to disclose related party transactions and materially
understated Gupta's compensation. Although Raval did not make any pecuniary
benefits, he failed to discharge his duties and take meaningful action to
further investigate Gupta's misconduct and misappropriation of company funds.
The SEC charged Raval for failing in
his 'affirmative responsibilities' and thus violating the anti-fraud, proxy,
and reporting provisions of the US Exchange Act. To settle his case, Raval
consented to the entry of a permanent injunction prohibiting future violations
of the related provisions of the federal securities laws, a $50,000 civil
penalty, and a five- year ban from serving as an officer or director of a
company.
Indian scenario:
In Bhopal Gas Tragedy verdict, the
Bhopal Trial Court on 7th June 2010 has held Keshub Mahindra reputed
industrialist, the then non executive chairman of Union Carbide India
limited(UCIL), guilty and sentenced him to two years of imprisonment alongwith
seven others accused. He was charged of attending only a few meetings in a year
and took only macro view of the company's developments. A non-vigilant act of
non- executive chairman, accounted for death of thousands.
"Ignorance" of the system by the director of the company is
unacceptable. Role of non executive director in this case is questionable.
Later he was granted bail.
Lead Independent Director
Internationally, it is considered a
good practice to designate an independent director as a lead independent
director or senior independent director. He coordinates the activities of other
non-employee directors and advises chairman on issues ranging from the schedule
of board meetings to recommending retention of advisors and consultants to the
management.
•
Acts
as the principal liaison between the independent directors of the Board and the
Chairman of the Board;
Develops the
agenda for and preside
at executive sessions of
the Board's independent directors;
seeking to ensure that the
independent directors can perform their duties responsibly while not
interfering with the flow of Company operations;
• Advises
the Chairman of the Board as to an appropriate schedule for
Board meetings,
Approves with the Chairman of the
Board the agenda for Board and Board Committee meetings and the
need for special meetings of the Board;
• Advises the Chairman of the Board
as to the quality, quantity and timeliness o f the information submitted by the
Company's management that is necessary or appropriate for the independent
directors to effectively and responsibly perform their duties;
•
Recommends
to the Board the retention of advisors and consultants who report directly to the
Board;
•
Interviews,
along with the chair of the Nominating and Corporate Governance Committee, all
Board candidates, and make recommendations to the Nominating a nd Corporate
Governance
Committee;
•
Assists
the Board and Company officers in better ensuring compliance with and
implementation of the Governance Guidelines;
•
Serves
as Chairman of the Board when the Chairman is not present; and
•
Serves
as a liaison for consultation and communication with shareholders.
California
Public Employees' Retirement System (CalPERS) provides that where the Chairman
of the board is not an independent director, and the role of Chairman and CEO
is not separate, the board should name a director as lead independent director
who should have approval over information flow to the board, meeting agendas,
and meeting schedules to ensure a structure that provides an appropriate
balance between the powers of the CEO and those of the independent directors.
Other roles of the lead independent director should include chairing meetings
of non-management directors and of independent directors, presiding over board
meetings in the absence of the chair, serving as the principle liaison between
the independent directors and the chair, and leading the board/director
evaluation process.
Given
these additional responsibilities, the lead independent director is expected to
devote a greater amount of time to board service than the other directors.
Chairman
The
responsibility for ensuring that boards provide the leadership which is
expected of them is that of their chairman. Chairmen, however, have no legal
position; they are whoever the board elects to take the chair at a particular
meeting. Boards are not bound to continue with the same chairman for successive
meetings. In law, all directors have broadly equal responsibilities and
chairmen are no more equal than any other board member. Chairmen are an
administrative convenience and a means of ensuring that board meetings are
properly conducted.
Thus from a statutory point of view
there is no necessity for a board to have a continuing chairman. The chairmanship
could, for example,
rotate among board
members. Although board chairmen have no statutory
position, the choice of who is to
fill that post is crucial to
board effectiveness. If the chairman is not upto the task, it is improbable
that the meeting will achieve anything but
frustration and waste of that
most precious of
resources—time. Continuity and
competence of Chairmanship is vital
to the contribution which boards make
to their companies. The leaders
which boards give to their companies, stems from the leadership which chairmen
give to their boards. The Chairman's primary responsibility is for leading the
Board and ensuring its effectiveness.
The
role of the Chairman includes:
· setting the Board agenda, ensuring
that Directors receive accurate, timely and clear information to
· enable them to take sound decisions,
ensuring that sufficient time is allowed for complex or
· contentious issues, and
· encouraging active engagement by all
members of the Board;
· taking the lead in providing a
comprehensive, formal and tailored induction p rogramme for new
· Directors, and in addressing the
development needs of individual Directors to ensure that they have
· the skills and knowledge to fulfill
their role on the Board and on Board Committees;
· evaluating annually the performance
of each Board member in his/her role as a Director, and
· ensuring that the performance of the
Board as a whole and its Committees is evaluated annually.
· Holding meetings with the non
executive Directors without the executives being present;
· ensuring effective communication
with shareholders and in particular that the company maintains
· contact with its principal
shareholders on matters relating to strategy, governance and Directors'
· remuneration. Ensuring that the
views of shareholders are communicated to the Board as a whole.
· As per the Institute of Directors
(IOD) (UK), the following are the responsibilities of a chairman
· The chairman's primary role is to
ensure that the board is effective in its tasks of setting and
· implementing the company's direction
and strategy.
The
chairman is appointed by the board and the position may be full- time or part
time. The role is often combined with that of managing director or chief
executive in smaller companies. However, the joint role is considered to be
less appropriate for public companies listed on the The main features of the
role of chairman are as follows:
· Being chairman of the board, he/she
is expected to act as the company's leading representative
· which will involve the presentation
of the company's aims and policies to the outside world;
· To take the chair at general
meetings and at board meetings. With regard to the latter this will
· involve:
· the determination of the order of
the agenda;
· ensuring that the board receives
proper information;
· keeping track of the contribution of
individual directors and ensuring that they are all involved in
· Discussions and decision making. At
all meetings the chairman should direct discussions towards the emergence of a
consensus view and sum up discussions so that everyone
· understands what has been agreed;
· To take a leading role in
determining the composition and structure of the board. This will involve
· Regular reviews of the overall size
of the board, the balance between executive and non-
· Executive directors and the balance
of age, experience and personality of the directors.
CHIEF EXECUTIVE OFFICER (CEO)
The
Board appoints the CEO based on the criterion of his capability and competence
to manage the company effectively. His main responsibilities include developing
and implementing high- level strategies, making major corporate decisions,
managing the overall operations and resources of a company, and acting as the main
point of communication between the board of directors and the corporate
operations.
He
is involved with every aspect of the company's performance. The CEO is
supported and advised by a skilled board and CEO is ultimately accountable to
the board for his actions. The most important skill of a
CEO
is to think strategically. His key role is leading the long term strategy and
its implementation, it further includes:
Developing implementation plan of
action to meet the competition and keeping in mind the long
· term existence of the company
· Adequate control systems
· Monitoring the operating and
financial outcomes against the set plan
· Remedial action
· Keeping the Board informed
CEO
should be able to, by the virtue of his ability, expertise; resources and authority
keep the company prepared to avail the benefit of any change whether external
or internal.
Separation of role of Chairman and Chief Executive Officer
It
is perceived that separating the roles of chairman and chief executive officer
(CEO) increases the effectiveness of a company's board.
•
It
is the board's and chairman's job to monitor and evaluate a company's
performance. A CEO, on the other hand, represents the management team. If the
two roles are performed by the same person, then it's an individual evaluating
himself. When the roles are separate, a CEO is far more accountable.
To
prevent unfettered decision making power with a single individual, Corporate
Governance Voluntary Guidelines, 2009 provide for the separation of the roles
of the chairman of the Board and that of the Managing Director/CEO.
ICSI
Recommendations to strengthen Corporate Governance suggests that there should
be clear demarcation of the roles and responsibilities of the chairman of the
board and that of the Managing Director/ CEO. The roles of Chairman and CEO
should be separated to promote balance of power.
The
chairman is responsible for leadership of the board, ensuring its effectiveness
on all aspects of its role and setting its agenda. The chairman is also
responsible for ensuring that the directors receive accurate, timely and clear
information. The chairman should ensure effective communication with
shareholders. The chairman should also facilitate the effective contribution of
non-executive directors in particular and ensure constructive relations between
executive and non-executive directors.
A
clear demarcation of the roles and responsibilities of the Chairman of the
Board and that of the Managing
Director/CEO promotes balance of
power. The benefits of separation of roles of Chairman and CEO can
be:
1. Director Communication: A separate
chairman provides a more effective channel for the board to express its views
on management
2. Guidance: a separate chairman can
provide the CEO with guidance and feedback on his/her
performance
3. Shareholders' interest: The chairman
can focus on shareholder interests, while the CEO manages the company
4. Governance: a separate chairman
allows the board to more effectively fulfill its regulatory requirements
5. Long-Term Outlook: separating the
position allows the chairman to focus on the long-term strategy while the CEO
focuses on short-term profitability
6. Succession Planning: a separate
chairman can more effectively concentrate on corporate
succession plans.
The chairman may be a person outside
the board?
• True or False
COMPANY SECRETARY
Section
2(45) of the Companies Act, 1956 defines the term 'secretary' to mean a company
secretary within the meaning of Section 2(1)(c) of the Company Secretaries Act,
1980 and includes any other individual possessing the prescribed qualifications
and appo inted to perform the duties which may be performed by a secretary
under the Companies Act, 1956 and any other ministerial or administrative
duties. Every company in India having a paid- up capital of not less than
rupees five crore (limit increased from rupees two crore to five crore in 2009)
shall be requiring to appoint a whole-time company secretary.
Under
Section 5 of the Companies Act, the company secretary has also been included in
the category of the officer of the company and shall be considered to be in
default in complying with any provisions of the Companies Act, 1956.
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