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Corporate Social Media Governance- A Key Boardroom Agenda!!

Around the Globe, Audit and Auditors, Audit Committees, BSE, CA, Chartered Accountants, Companies Act 2013, Companies Act,1956, company secretaries, Corporate Governance, Corporate Social Responsibility(CSR), MCA, Rules -Companies Act 2013, Statutory Auditors/Internal Auditors, , , , , ,

Our Article on ” Corporate Social Media Governance-A Key Boardroom Agenda” Published in ICSI 44th National Convention Souvenir!

1.Introduction

Over the past few years, corporations around the globe have been trying to figure out how to enter the social media ecosystem. Some decided to jump in and quickly learn how to swim. Others were pushed into the deep end and figured it out after thrashing around a bit. And then there are those that choose to avoid it altogether, hoping to avoid risk. Unfortunately, if such organizations believe they can avoid social media – they cannot. The organization can choose not to participate, but that does not mean the organization, or its products, its services, its programs, or its own workforces are not being talked about by the social community. And so while there are risks in engaging the stakeholders of an organization using social media, there are also risks in avoiding it altogether. The key to managing such risks is developing a clear-cut social media governance program.

Social media governance is a set of business processes put in place to support the social vision of a company with relevant targets and guidelines. Its purpose is multi-fold – educate and guide the relevant stakeholders, define social media processes, maintain brand reputation across all channels online and offline, establish rules which govern conduct and broadly define company social media goals.

Since the rise of the Internet in early 1990s, the world’s networked population has grown from the low millions to the high billions. Over the same period, social media  has become a fact of life for corporate society worldwide, involving not only the large corporate organizations, but also the regular organizations, the workforce, activists and also the key board personnel who play a key role in establishing such key policies to address the risks and challenges of social media while also using the medium to prosper company’s set objectives, goals and its vision, and thus in turn making initiatives to ensure high level of social media governance.

Social media has become an indispensable business tool. Most organizations have strong controls in place for email but few apply the same rigor to new methods such as enterprise social networks and social media. Sound social media governance will not only enable the organization to manage the risks that arise from social media’s inherently public nature and global accessibility, but also allow to make the most of the opportunities it brings and stay ahead of change.

It is becoming increasingly a key strategic component for companies and its Board of Directors to understand the risks and challenges related to social media and has a clear strategy in place which sets out how they will use it and for what purpose. Social media blunders are becoming increasingly more commonplace in the news and getting social media wrong can have a serious impact on a company’s reputation and its brand value. Social media brings its own challenges but having a sound and practical strategy which is easy to understand will ensure risks are managed and benefits realized.

  1. Effective Social Media Governance Model- Key Agenda for Board of Directors:

An effective social media governance model is not limited to controlling of risks and challenges involved in social media but there should also be consideration for various other components that can help implement a sound and effective Governance Model. The Board of Directors of any organization should consider the following key components and integrate them in the company’s social media governance measures to effectively address various social media risks:

 Social Media Policy:

A social media policy is the foundation of any social media governance model. Its purpose is twofold: to guide the employees of the organization and to protect the organization and its customers from risk. Any organization should have a social media policy regardless of whether or not your business is actively engaged in a social media strategy.

At a bare minimum the social media policy should include specific guidelines for each of the top three social media platforms: Facebook, Twitter and Linkedin. But though social media has become synonymous with that trio of powerhouses, the landscape is vast, encompassing blogs, wikis, podcasts, video sharing, micro-blogging, community forums and other tools. While it’s not necessary to develop a set of best practices for each of them, the Board should have a clear and consistent set of expectations that covers all your organization’s primary social channels and its review should form part of Board Meetings Agenda from time to time.

Monitoring:

Your brand is likely being discussed on the social web whether you’re engaged in the conversation or not. Google Alerts and Twitter are two social medium that offer simple ways to search for the names of your brand, employees and competitors. Social Media Monitoring tools like Sysomos and Hoot Suite offer more robust tools for acquiring, analyzing and acting on intelligence. Regardless of the tool you use, monitoring is a must for everything from shaping consumer sentiment about your brand to heading off a potential PR crisis.

Training & Education:

A solid governance model should have plenty of educational resources for employees. This should include training on responding to customer feedback, both positive and negative. Typically, it’s the customer support and Public Relation organizations that are tasked with the responsibility of responding to customer feedback. However, social media is breaking down the traditional boundaries and depending on company’s social media engagement policy, it could be a marketing or salesperson that has to respond to a customer query. So it’s essential to have training as a cornerstone of your social media governance model.

Approval Processes:

A governance model should clearly call out what approval processes are in place for employees to engage in social media. It should answer questions such as: Can everyone participate? or only certain key executives, directors or authorized representatives can via your company’s social channels? What is the process for getting approval for an official account? Approval processes ensure an organization’s social media accounts are headed by responsible personnel and the risks of misuse is minimized.

Crisis Management Plan:

In 2009, Toyota launched the largest recall in the company’s history in response to hundreds of reported cases of sticking accelerator pedals on account of the pedal getting caught in the floor mat, making affected vehicles speed up uncontrollably, and it was linked to at least 50 reported fatalities. Rumors and panic spread across the web, and suddenly the brand, a model of automotive safety for decades, was embroiled in a digital disaster with little foundation in social media with which to combat it.

A PR crisis doesn’t have to be as dramatic as Toyota’s to be damaging. The Toyota recall illustrates a common thread that runs through all PR crises: a slow response from the organization exacerbates the crisis. At its basic level, a crisis management plan should outline how to use the social media channels to deliver a quick and appropriate response and it should form part of your social media governance initiative.

Toyota eventually turned to social media to repair its image, but its effort would have no doubt been more effective if it could have been leveraged to diffuse the controversy before it spiraled out of control.

While keeping in consideration such components of social media governance model, board should also first assess such social media risks and develop an eco system to effectively address such risks.

  1. Social Media Risk

Social Media risk becomes a prime concern for every business in the present global competitive and knowledge based environment. The company uses the social media platform to reach out its goals and at the same time social media has many risks which affects the growth of the Management. The risks are as varied as an unauthorized post, a social media account getting hacked or an authorized company post that ultimately proves ill-advised. A time-tested strategy of pre-emptive mitigation and comprehensive pursuit of insurance coverage post-loss provides the best protection against social-media related losses.

Whether it is a small, medium, or large-sized business, the brand’s health and reputation is often defined by the way they engage in public environments.  In short, the board need to identify the risks of social media, develop comprehensive governance policies to mitigate risk and then deploy the right technology to reinforce those polices.

Managing Social Media Risk

Every business entity in the world exists to provide value for its stakeholders. All entities face uncertainty or risk and the challenge for the board is to determine how much uncertainty or risk to accept as it strives to grow stockholder value. Uncertainty presents both risk and opportunity with potential to erode or enhance value.

Social media offers considerable advantages like Branding, Marketing/advertising, Corporate Communications, servicing, grievances resolution to business entities, but establishing and maintaining a social media presence can also expose companies to a broad array of risks. By considering the current scenario, companies are not taking the social Media risks seriously and inadequately prepared to for the challenges brought by social media.

Various types of Social Media Risk:

While offering a host of potential business benefits, the use of social media can expose companies to numerous business risks. Most of these risks result from a combination of organizational weaknesses and vulnerabilities exposed through data misuse and data sharing:

Reputational Risk :

Negative exposure on social media sites about the company’s name, can result in loss of trust and revenues. There are other several risks also connected to the reputational risks like Strategic risk, Business risk, Regulatory risk, Legal risk, Market risk. If reputational risk is not handled in a proper way, these connected risks can lead to serious negative consequences including fraud, intellectual property loss, financial loss, privacy violations and failure to comply with laws and regulations.

Fraud Risk:

While engaging directly with the public, in real time, mistakes are bound to happen. Employees may also be hacked in the social media and may lead to manipulate the information and it leads the way for fraudsters to gain access to company’s database.

Legal Risk:

Potential issues range from adherence with privacy laws, to content ownership, to intellectual property infringement, to human resources issues such as such as harassment, discrimination and defamation.

Data Risk:

Firms need to meet the regulatory requirements of collecting, processing, handling and storing data. The corporate network should be secured to prevent confidential client data and other information from leaking out, or even across, the organization. The firm should be protected from incoming threats when social media users inadvertently introduce malware into the organization or employees are targeted by cyber criminals. Global firms need to comply with local data protection regulations when employees are connecting with each other and sharing documents across borders.

Non Compliance Risk:

Industry regulations vary by industry, geography and culture. There are many rules and regulations are available to govern electronic communications. Categories of rules include recordkeeping, adhering to advertising requirements and supervision of employees. Firms must be able to provide proof of compliance when regulators conduct audits as well as respond to e-discovery requests.

Financial Risk:

Missteps can have a negative impact on share prices and result in fines from regulators or data protection enforcement agencies.

Costs Risk:

 Although social media is viewed as “free”, firms may need to hire experts to work through their governance issues, third party vendors to provide platforms to manage access and retain records and writers or agencies to develop content.

Bandwidth Risk:

Resources are required to develop, manage, supervise and adjust both internal and external social media programs. Updates may be reviewed by departments that could include corporate communications, marketing and compliance.

4.Social Media Governance by Board- A key element of Corporate Governance:

1.The Board shall frame the policy for Managing the Social Media Risk that helps in identifying and exploring many of the potential negative consequences posed by social media in terms of brand, strategy, regulatory, legal and market risk. More important, it outlines a holistic approach to identifying, assessing and managing those risks.2. Engage in enterprise-wide change management activities to create a more risk-aware culture in the organization which will give exposure to both the significant benefits and the distinctive risks of social media and putting in place the compliance and performance management capabilities that can lead to changed behavior in social media usage.3. Assess uncertainties arising from social media.4.Restructure the existing risk governance structures.5.Enforce advanced tools and technologies for monitoring social media.6.Evaluate the performance management capabilities to analyze and act on the metrics delivered from monitoring activities.8.Engage in enterprise-wide change management activities to create a more risk-aware culture.

 Steps involved in Implementing Social Risk Management Policy

  1. Governance:

Governance is focused on creating new structures, policies and accountabilities for managing social media risk, as well as the awareness of how the organization is using social media strategically and operationally. Although general governance principles apply in the realm of social media as with other corporate strategies, some specific differences and permutations need to be noted in several areas, including the need to coordinate effectively across functions and the need to have well-defined crisis management procedures that can be instituted at a moment’s notice.

An established social media risk management structure including:

  1. Formally defined roles and accountabilities enterprise-wide and within exposed functions.
  2. Coordination among business units.
  3. Acceptable-use policies for social media.
  4. Well-defined risk tolerance levels.
  5. Defined escalation pathways.
  6. An operating model for crisis management.

II. Process:

Effective social media risk management processes protect operations and the brand in a cost-effective way—adjusting operations for proactive social media risk assessment and monitoring. Companies are already aware of the importance of having consistent processes in place to handle identifying, measuring, managing and reporting on risks. However, such processes will often look somewhat different in the social media world, in part because of the always-on nature of social networking platforms.

Consistent processes to manage operations while identifying business opportunities. Processes include:

  1. Social media risk identification across categories (e.g., reputation, intellectual property, fraud prevention, business disruption)
  2. Risk assessment, reporting and monitoring.
  3. Cost-effective risk mitigation/transfer.

III. System:

Board should be capable of monitoring social media networks in real time to identify what is being said about your company and what issues arise from that chatter from the standpoint of regulatory, business and brand risks. Such monitoring is now largely dependent on advanced technology. Improving the effectiveness of IT systems in the context of social media risk management is primarily about improving the management and analysis of data and using new technologies to monitor social media sites as a means of mitigating risks. Vast amounts of data are now on social media platforms and so companies need and want to manage that data effectively. Several capabilities are important here.

Effective use of technologies to improve data management and the monitoring of social media activity, including:

  1. Social media data mining and capture (e.g., analytics, web crawlers)
  2. Text analytic engines
  3. Data security and storage
  4. Reporting and dashboards

5. Opportunities and Challenges Of Social Media On The Company and the Strategies to be adopted by the Board:

Hence, in today’s world of Social Media as discussed above, we feel that a blow to an organization’s reputation may prove to be fatal even without any actual wrong doing by the entity itself- Perhaps as a result merely of a perception of inappropriate behavior  or even just the grievances of one or two individuals. Such attacks on the reputation of the organization can have a drastic effect typically on the brand value of the company.

In order to mitigate the risks, challenges and opportunities as discussed earlier and to keep in mind the effective functioning of the Board amidst the scenario of such risks, opportunities and challenges , effective strategies shall be planned and implemented at the right point of time in the Organization.

It is essential that the Board takes pro active interest in the Governance of the Social Media, since in the Light of present circumstances of increasing participating stakeholders, a good board leads to good decisions and good decisions lead to value oriented sustainable stakeholder value.

To design a strategy that can be productively implemented is a tricky task. However, there are a few questions which the Board / the organization collectively can ask before developing a strategy.

  • Does our organization have a social media policy and what does it cover?
  • Do we think about social media from a perspective of both risk and opportunity?
  • Is there a designated position in our organization to manage social media
  • Does our organization monitor social media and, if so, for what?
  • Do we monitor social media internally, or is the function outsourced?
  • Does our organization monitor social media, traditional media, and other sources to determine the public perception of our organization and the public acceptability of our business strategies?
  • Do we monitor the public’s opinion on our competitors and our industry?

Above are vital concerns from the perspective of the Company/ Organization and the Board.

6.Role of Company Secretary- A Governance Professional:

Being a Governance Professional, a Company Secretary must be conscious  of the strategies the Boards shall devise for planning, implementing and monitoring the Social Media Governance Model . Times have changed and the Company Secretaries are getting transitioned into Governance Professional. Since Governance or the lack of it has assumed a centre stage, the professionals in our field need to be dynamic and zealous enough to guide the Board in not only in the matters of Law but also in recommending the Board good practices to carry out smooth functioning of the Board.

Below are few guidelines which we as professionals shall recommend to the Board and which shall also be supportive to the Board in shaping strategies for Social Media Governance:

1) Demystify social Media during a Board Meeting. To ask the Company to deploy staff/employees who can look after the following:

  1. company’s specific target market who uses social media
  2. a comparative analysis of what competitors are doing
  3. research on reach and future trends in social media; criteria to use research on reach and future trends in social media; criteria to use
  4. the difference between inbound and outbound social media

2) Advise the Board in determining the material matters relating to the Social Media Disclosures and taking up those material matters for approval in the Board meeting and /or committees thereof in order to avoid the circumstances of Insider Trading claims and risk of confidential information getting leaked. Social Media Risk should be part of Risk Management Policy of the Company.

3)  Advise the Board in maintaining a reasonable approach while divulging information on the Social Media. As a Governance Professional to the Organization, care must be taken to guide the client on the information to be placed on the social media since social media tools can be used during a crisis to federate the protestors in gathering the information that can be used in litigation, putting Board Members in a liability suit situation.

A very talked about example shall demonstrate on why it should be ensured that social media should be on a Board’s Agenda. A few years ago, Nestlé was the target of a Greenpeace social media campaign for using palm oil that they claimed was harvested unsustainably, endangering several animal species in Indonesia. The group posted videos on YouTube and other channels that went viral before the company was able to get them removed. The removal then prompted further outcry: tweets and Facebook posts multiplied, and damage that in the past would have taken months of on-street petitions and letter campaigns accrued in mere days, with hundreds of thousands of conversations happening outside the company’s reach and influence.

4) Enlighten the Board regarding various provisions of Cyber Laws in order to be meticulous with the disclosures. There are several Intellectual Property Rights concerns for which the Company / the Organization needs the expert guidance of Professional experienced in dealing with the Proprietary aspects of the Company.

5) Advise whether the Company should have a whistle blowing mechanism through social media or not depending upon the size of the stakeholders and nature of business the Company is in.

However, be that as may, there are opportunities as well which are seldom unexploited by the Board since social media tends to make the Board of Directors perturbed.

Further, the Board can also carry on  developing frameworks with regards to stakeholder value that address the key challenges of social media governance for the workforce, including

1) Listening to what is being said:

Listening to what the stakeholders feel about the Company is an essential thing which most of the Companies fail to notice. Most of the activities happen on the website of the Company on advent of a new move of the Company and in order to propagate what the Company or the Board of Directors feel about the same. With the social media coming into the picture, the stakeholders of the company would be able to voice their opinions for a particular move and thereby the Board and the Company shall be able to reasonable inference regarding success or failure of the same.

2) Employees Perspective:

Social media provides an opportunity for senior management and boards to understand employees’ opinions and perspectives as well. An internal Social Media Platform should be created so that the employees can express their opinions and voices in a decent and constructive manner. The Board of the Company in this regard shall always keep in mind that the employees of the Organization are the first advocates of the Organization. Every employee talks about his/her workspace with his/her peers. The Board / the management of the company has to take care that the organization is valued in the eyes of the people who work for it. After all, no review is better than the review from the person who is working for the organization. The Board should take steps to harness this very fact.

3) A Channel of Communication with the Public:

Companies that understand what stakeholders are saying, and where to find the conversations, are better able to integrate their social media strategy into the broader corporate communications strategy. Companies that are willing to engage themselves onto a Social Media conversational platform tend to make a larger customer base since the doubts queries and concerns are responded to infect immediately.

4) Social Media is like a market research group which is never commissioned:

There are all sorts of communications about the Company when the Company is on social media. Social Media is so far one of the best ways to figure whether the Companies activities are niche to a market or not.

5) Influencing Decision making:

Once the management of the Company is done with the phase of propagating and exchange of ideas and receiving of the feedbacks, the Board/top management of the Company by then becomes well equipped with the relevant information and/or report regarding the market sentiment and the level of stakeholder satisfaction on any particular move of the Company. In this manner the Board or the top management may rather be able to make a better informed decision. The Probability of the Board / the top management going wrong in their decisions is significantly reduced through the adoption of social media mechanism.

6) Mitigating Social Media Impact:

The Board should develop speedy approval processes to enable rapid responses to Social Media Chatter and authorized designated officer for such speedy responses. Board should constitute “Digital Acceleration Team” to respond speedily to the problems as they surfaced.

Conclusion:

The advantages of using various social media effectively can be considerable in terms of insight, competitive advantage, cost savings and efficiencies. Good Social Media Governance ensures that the outlays associated with social media blunders can be minimized. This is vital. A happy customer’s view can be beneficial to business but the viral nature of social media means that organizations can be at risk, not just externally but internally. We as professionals along with board can play a key role in social media governance by not only growing organization wide awareness and developing a social media strategy but also ensuring compliances and addressing key issues to ensure that social media is compliant and ensuring Social Media is on the Board agenda.

                                                          ***********

(References: Online resources including following links:
http://www.rmmagazine.com/2013/10/02/effectively-managing-social-media- risks/,

http://www.pwc.co.uk/governance-risk-compliance/insights/do-you-think-policy-is-the-only-way-to-manage-social-media-risk1.html

,https://erm.ncsu.edu/library/article/social-media-risks,

http://www.instituteforpr.org/social-media-and-financial-services-rules-regulations-and-risk/,

http://www.socialmediatoday.com/content/what-social-media-governance-and-5-key-elements-successful-model,

http://socialmediavoice.com/2012/01/10-social-media-law-governance.html,

http://www.kunocreative.com/blog/bid/69119/9-Steps-for-Creating-Corporate-Social-Media-Governance

 

Amendment in the Companies (Audit and Auditors) Rules’ 2014

Audit and Auditors, Chartered Accountants, Companies Act 2013, company secretaries, Corporate Governance, Corporate Social Responsibility(CSR), MCA, Ministry of Corporate Affairs, Rules -Companies Act 2013, Statutory Auditors/Internal Auditors

The Ministry of Corporate Affairs(MCA) vide its notification dated 14.12.2015 released following rules to amend  Companies (Audit and Auditors) Rules, 2014.

In the earlier Rule 13(1) of Companies (Audit and Auditors ) Rules, 2014,only word “Auditor” was used instead of Statutory Auditor. Further, there was no minimum monetary limits fixed for reporting of fraud by auditors to Central Government and time limit to report to Central Government was immediate but not later than 60 days of his knowledge of occurrence any such fraud. Moreover, details of each of the fraud reported to the Audit Committee or the Board  during the year was not specified to be disclosed in the Board’s Report :- (a) Nature of Fraud with description; (b) Approximate Amount involved; (c) Parties involved, if remedial action not taken: and (d) Remedial actions taken.

These Rules may be called the Companies (Audit and Auditors) Amendment Rules , 2015.

They shall come into force on the date of their publication in the Official  Gazette.

For Rule 13, the following rule shall be substituted’ namely:-

“13. Reporting of frauds by auditor and other matters:

(l) lf an auditor of a company’s in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees  one crore or above, is being or has been committed against the company by its officers or employees , the auditor shall report the matter  to the Central Government

 (2) The auditor shall report the matter to the Central Government as under :-

(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud seeking their reply or observations within forty-five days;

(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations ;

(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;

(d) the report shall be sent to the Secretary , Ministry of corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;

(e) the report shall be on the letter-head of the auditor containing postal address’ email address and contact telephone  number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

(f) the report shall be in the form of a statement as specified in Form ADT-4

(3) In case of a fraud involving lesser than the amount specified in sub-rule (l ), the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:- (a) Nature of Fraud with description; (b) Approximate amount involved: and (c) Parties involved.

(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (13) during the year shall be disclosed in the Board’s Report :- (a) Nature of Fraud with description; (b) Approximate Amount involved; (c) Parties involved, if remedial action not taken: and (d) Remedial actions taken.

(5) The provision of this  rule shall also apply, mutatis mutandis , to a Cost Auditor or a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.”;

(ii) In the principal rules, after Rule 14 and before FORM NO. ADT-I, insert the word “Annexure”;

(iii) In the principal rules, in Form No. ADT-4,- (A) in line 3, for the word, figures and brackets..rule l3(4)’,, the word, figures, letter and brackets “rule 13(2)(f)” shall be substituted; and

(B) in line 25, in item No. (10), for the word, figures and brackets,,rule l3(l),’, the word, figures, letter and brackets “rule l3(2)(a),’shall be substituted.”

Suggestions: These Rules shall also apply, mutatis mutandis to Internal Auditor of the Company  during the performance of his duties.He also plays an important role in establishing and monitoring the Internal Controls in the Company and is equally accountable to stakeholders at large.

(Source: http://www.mca.gov.in/Ministry/pdf/Amendement_Rules_14122015.pdf)

Article on “WOMEN COMPANY SECRETARIES- EMBARK ON A JOURNEY TO BOARD SEAT!!

Around the Globe, Companies Act 2013, company secretaries, Corporate Governance, The Companies Act, , , , , , , , ,

Read my Article published in ICSI e-nitor on  “WOMEN COMPANY SECRETARIES- EMBARK ON A JOURNEY TO BOARD SEAT!! https://www.icsi.edu/Webmodules/EJournel/1st%20october%202014%20e-csnitor.pdf

Digital Board Packages

Corporate Social Responsibility(CSR),

With the increasing stress on corporate governance the role of directors under the Companies Act, 1956 (the Act) has come into sharp focus. The Directors are managerial persons and elected representatives of the shareholders. They individually and collectively hold the position of trust and have fiduciary and statutory duties towards the company, the shareholders and others. They are not agents for individual shareholders or members. The major responsibility of the Board of Directors is to direct the affairs of the company and to exercise such control that the wealth and wealth creating assets of the company are protected. Extensive board responsibilities are found in the Canadian Guidelines which identify five specific components of the board’s stewardship’s responsibilities as follows:

 1. Adoption of a strategic planning process

2. Management of Risk

3. Appointment, training and monitoring of senior management, including succession

4. Effective communication and

5. Ensuring the integrity of corporate internal control and management information systems.

If a director fails to perform their huge fiduciary and statutory duties towards their organization, they are held severally liable. They can protect themselves from liability where they have made a business judgement in good faith for a proper purpose and rationally believed it to be in the best interests of the company. For performing their duties efficiently and diligently in a timely manner, access of proper and timely information for  understanding business of the organization by them is vital . There should be a proper system in the organization for board communication ensuring that no information is left out to be disseminated. It has often come to notice that mostly in all big corporate scandals, most of the directors more particularly independent directors could not act in time due to non receipt of crucial information from the management of the organization in a proper and timely manner due to which they have to face severe legal battles.

 It is often seen that for conducting a single meeting in the organization, on the average 4000 pieces of papers are used and appox. 40 hours of the C-Suite Executives is utilized in preparing, binding and dispatching agenda to the Board Members which imposes huge financial burden on the organization.

 In order to have streamlined, cost saving communication process, more companies are looking forward to having e-board for ensuring intelligent communication between Directors.

A “Paperless Board” also referred as “Digital Board or e-Board” is creating an environment in which the use of paper is eliminated or greatly reduced. It is Electronic document management which replaces traditional ways of disseminating information.

How Digital Board Packages works?

  1. It is a new concept gaining momentum in the past few years.
  2. It is an Electronic Document Management where iPads or tablets are used by the Board of Directors and C-Suite Executives for disseminating information. It is an online board portal of the organization.
  3. It is web-based services that centralizes all the information and processes that director needs to do their jobs efficiently and effectively.
  4. It gives secure electronic environment. The administrator of the online board portal can continuously update portal by uploading all information, financial statements, company policies, procedures, newsletters and reports, meeting agendas, minutes for consideration of Directors in time. Directors are assigned user id and password through which they can access all uploaded information, agendas, past or present minutes, approvals, calendar, policies and procedures and even confidential documents 24*7 anywhere offline or online and connect to Board Portal anytime.
  5. All information and documents can be downloaded by directors online and saved in their iPad and they can take it with them to access it later on even on boarding the plane. Even past meeting’s agendas, minutes and relevant documents can be accessed by them anytime.
  6. Information can be shared interactively between meetings, written consent can be given by directors on any subject matter, even absent directors can access meetings online.
  7. By having a video conferencing facility on the iPad, directors can also take part in meetings via video conferencing.
  8. Directors can store their private notes on reading any information or agenda points which they want to discuss in the meeting without viewing by other directors.
  9. Directors can leave comments/questions regarding any document, agenda point, they have read. All board members will able to view it and communicate with each other without any delay.
  10. Quick opinions on specific issues can be done by conducting online polls among all board members via board portal.
  11. If any contract or document is to be reviewed and signed by any director and when a document or contract is getting closer to the expiration date, then an email reminder can be sent to him for reviewing it.
  12. Adoption of Digital Board Packages will lead to good corporate governance, more accountability and transparency, reduce organizational risk, increase better communication and collaboration between directors creating more practical, convenient, green environment in the organization.

Hence, spending hours after printing, passing and signing the documents, board members and executives enjoy looking at important documents on their computer screens.

It’s the best way to make information available to directors 24/7. If it’s 12 o’clock at night and any director does not remember any point in the contract or policy of the organization, they he can go in the organization board portal and refer it.

More and more organizations should come forward and adopt this newest technology to make board life easy.

India ranks 7th among 11 Asian Countries in Corporate Governance

Corporate Governance

I thought of sharing some enlightening insights from ACGA“CG Watch 2012”.

On September 19, 2012, Asian Corporate Governance Association (ACGA) jointly with CLSA Asia-Pacific Markets publicly released “CG Watch 2012”, its sixth joint survey on corporate governance in 11 Asian markets undertaken since 2003. The 11 Asian Markets selected for Corporate Governance Survey was Singapore, Hongkong, Thailand, Japan, Malaysia, Taiwan, India, Korea, China, Philippines and Indonesia.

As per the survey, most of the rising markets are in Southeast and South Asia including Singapore, Thailand, Malaysia, Korea, India and Philippines. North Asia Markets i.e Japan, Taiwan, China and Indonesia markets are falling.  Hongkong   is rising marginally.

 As per survey report, the main reasons for falling markets in North Asia are rigid hierarchies and closed corporate cultures followed in most companies, conflicts between regulators and conservative corporates over company law/board reforms, weak government steps in developing corporate governance culture.  On other hand, main reasons for rising markets in South Asia are clearer corporate governance policies in area of Board reforms and shareholders rights, well designed and adopted systems regarding director training and board development, stronger government steps in developing clearer and consistent corporate governance policies and independent audit regulators.

 During the survey, the scores were given for 5 parameters i.e Corporate Governance Rules and Practices, Enforcement, Political and Regulatory, Accounting and Auditing (IGAAP) and Corporate Governance Culture.

 India ranks 7th among 11 asian countries gaining average score of 51 points.  India Inc score in the area of Corporate Governance Rules and Practices have dropped in 2012 as compared to 2007. Rules relating to timeliness and frequency of financial reporting, disclosure of director share transactions, disclosure of substantial ownership stakes i.e 5 percent and above, mandatory audit committee, non financial reporting, voting by poll, legal remedies for shareholders, definition of Independent Directors, Quality of Corporate Governance codes and pre-emptive rights was considered for giving scores.

 In area of Enforcement and Political and Regulatory Environment, India Inc score is higher in 2012 than its previous high in 2007 &2010.  In Accounting and Auditing (IGAAP) India and Hongkong market were found weak. As far as Corporate Governance Culture score is concerned few markets have made progress and shown improvement. India Inc score is stable in this area in 2012 as compared to its previous high in 2007. Six of the 11 markets are either stable or declining, while three of the remaining markets recorded only minimal improvement.

In light of above, India Inc needs to have stronger Corporate Governance Rules and Practices especially in area of non financial reporting, voting by poll, legal remedies for shareholders, Independent Directors, Quality of Corporate Governance codes and pre-emptive rights. Regulators should develop proper and strong political and regulatory environment and frame consistent, fair and strong rules, regulations to develop strong Corporate Governance Culture in India.

References: ACGA “CG Watch 2012: Market Rankings”, September,2012,

(http://www.acga- asia.org/public/files/CG_Watch_2012_ACGA_Market_Rankings.pdf)

Are Independent Directors, a Panacea for Corporate Governance??

Corporate Governance

What is Corporate Governance?

The Institute of Company Secretaries of India defines Corporate Governance-

“Corporate Governance is the application of best management practices, compliance  of  law  in  true  letter  and  spirit  and  adherence  to  ethical standards  for  effective  management  and  distribution  of  wealth  and discharge  of  social  responsibility  for  sustainable  development  of  all stakeholders.”

In recent years, corporate governance has received increased attention because of high-profile most talked scandals i.e.  Enron in USA and Satyam in India, involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers.

Meaning of Independent Director-

A layman’s definition of an Independent Director can be –

A corporate director who has no material relationship with the company in which he or she serves as director.       For example, an independent director cannot be employed or have a family member employed by the company.

Who is an Independent Director?

As per Listing Agreement as per SEBI, an Independent director’ means a non-executive director who –

(a) apart from receiving director’s remuneration, does not have any other material pecuniary relationship or transactions with company, its promoters, its directors, its senior management or its holding company, subsidiaries and associates, which may affect independence of the director.

(b) is not related to promoters or management at the board level or at one level below the Board

(c) Has not been executive of the company in immediately preceding three financial years

(d) is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following – (i) the statutory audit firm or the internal audit firm that is associated with the company and (ii) the legal firm/s and consulting firm/s and consulting firm/s that have a material association with the entity

(e) is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director and

(f) is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.

(g) Is not less than 21 years of age.

Independent directors may have a tenure not exceeding a period of nine years on the Board. [This is not a mandatory requirement].

Need of Independent Directors…

  •  To fulfill statutory compliances for appointment of Independent Directors as laid down as per listing agreement and applicable provisions of The Companies Act,1956.
  • To have representatives on the Board who shall watch that the affairs of the company are run in a transparent manner, scrutinize the management performance,oversee that the interest of all its stakeholders (investors, employees, vendors, customers, government and society at large.) are well protected, Resolve the conflicts, Establish best Internal controls and enhance the value of the company.

Changes in concept of Independent Directors as per Companies Bill, 2011

  •  Minimum 1/3rd of the total no. of Directors shall be Independent ; however Central Govt. shall have the power to increase – decrease  such minimum no. of independent directors in any public  company .
  • Independent Director shall be appointed by the company from the data bank of independent directors  as maintained by the CG and put on their website for the use of the companies making appointment of such independent directors.
  • Any resolution passed in the absence of the independent director shall be final only on ratification of such resolution by at least one independent director.
  • Audit committee shall consist of minimum three Independent Directors.
  • Schedule IV prescribes the code of independent directors.

Are Independent Directors (ID) truly Independent?

  1. Most of the ID  joined the companies due to their friendly relationship with promoters. So there will be rare dissent in the Board room.
  2. Policy makers have prescribed the criteria of “Independence”. No criteria as of possession of knowledge and expertise is prescribed for appointment of Independent Director. So How can we expect a Graduate or even undergraduate though “Independent” to audit the state of affairs of the company?
  3. ID do not have any means of verifying the information provided to them by the management of the company.
  4. Most of the times, IDs are not aware of what they are supposed to do in the Board Room.
  5. Every Meeting of Board and Committee fetches Rs.20000/- sitting fees and even 1 percent of Net Profit is permissible by Law for distribution among IDs and they can also fetch remuneration by presenting them on board of subsidiaries. So the entire remuneration structure of IDs are controlled and managed by the Board of Directors basically promoters, so there can be no dissent in Board room or they will shown the doors. There is pecuniary relationship between IDs and Management.
  6. IDs served on Boards of 15 companies as permissible under the Act and normally they attend 4 to 6 meeting in the year of each company and some times committee meetings are there on same day of Board Meeting. So they are unable to devote quality time.
  7. No women power on Board. Ratio is just 2-5 percent.
  8. There are poor board practices. Voluminous agendas of Meetings are circulated to all directors at shorter notice and critical items are placed at the end so that no time is there for directors to discuss the matter in details and even minutes are circulated late according to will of promoters.
  9. If IDs resigns or dies, there is no succession plan, no time limit is prescribed by the Act to appoint new ID except as per SEBI, it is 180 days which is also too long.

My Suggestions for Making role of Independent Directors(ID) More Effective..

 1. Appointment of Independent Directors should be made by the reputed agencies rather than Board or Shareholders and remuneration should also be paid by these independent agencies to them.

2.  Policy Makers should prescribe criteria for appointment and selection of ID not only on basis of “Independence” but knowledge of specifics, good track record, good business reputation, experience and expertise.

3. Proper Protocol or framework/Agendas should be drafted for IDs by the Policy Makers in the areas of Risk Management, Annual Budgeting, Significant transactions of non recurring nature, cash management, recruitment/attrition of below board level employees, Default in any of financial obligations, All statutory compliances and defaults, Funding options and HR Management Initiatives.

4. Indemnification Policies should be prescribed by the Policy Makers for IDs serving on Board of Companies.

5. Sharing in Profits by IDs should be banned as it in USA and UK as it will decrease the dependence. Cap on overall remuneration drawn by IDs should be fixed.

6.  Certain minimum age i.e 35 years and maximum age i.e 65 years should be prescribed to ensure the proper vigilance.

7.  Profiles of proposed IDs to be appointed by the company should be placed at its website for stakeholders comments.

8. The definition of “Relatives” as per The Companies Act,1956 should be expanded to cover Mother’s Side and Wife side relatives and also to cover more relatives.

9. Provisions of Quorum of Meetings should be amended under the Act, so as to include compulsory presence of at least 50 percent of Independent Directors in the Meetings.

10.Proper Budget should be given to the IDs by the Company for appointment of outside legal experts, consultants who can guide them individually in case of conflict of Interests.

11. Self Regulation instead of enhanced and mandatory regulations should be promoted by the Policy Makers i.e in form of mandatory ethical code, reputation pressure.

What you say??

( References: 1. The Naked Truth about Independent Directors by Prithvi Haldea,  2. Online reports and publications on ID’s and Corporate Governance.)