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.
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
• 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.
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
· 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
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
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
The chairman may be a person outside the board?
• True or False
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.