CORPORATE GOVERNANCE BEST PRACTICES

Applicable to all forms of organisations, Practices are divided into 3 heads- Structure of Board of Directors,
Operation of Board of Directors, and Other Corporate Governance practices

Structure of Board of Directors - 11

 BODs should be kept to a reasonable size, since large boards tend to be ineffective.
Rule of thumb- minimum 4, maximum 10
NPOs maintain large boards to increase the number of potential donors.

 Governing bodies (i.e. BODs) of all organisations should include completely independent directors,
preferably constituting majority of the board (*exception – private company).
Family-owned businesses need IDs to resolve conflict among the family members, and to create credibility for
company’s financial statements in minds of banks, FIs, and investors. NPOs need IDs to assist in their fundraising
activities and to create public credibility.

 Select IDs who are willing and able to devote necessary time to their director duties, and are competent
enough to assist organisation in working.

 The Chairman of the board should be an ID. In case he is not an ID, a lead or presiding director who is
independent should be appointed. *Except private companies

 IDs should meet separately from management directors at least once a year.

 Committees: Directors of all organisations must establish audit committees, compensation committees,
and in appropriate cases, nominating/ corporate governance committees composed entirely of IDs; or
alternatively, must perform the duties of such committees acting through the whole BODs (majority IDs).
All independent committees should evaluate their performance/ activities annually.

 The audit committee must include persons (independent auditors) who have the ability and willingness
to fully understand the organisation’s accounting. The committee is responsible for overseeing the
organisation’s financial reporting process, and should understand its internal controls system.
  Appoint full- time internal auditors. #hired and compensated by audit committee, report directly to
BODs.
Directors must have their own information pipeline into the company (reliable sources, apart from management)
in order to fulfil their state law fiduciary duties (i.e. to monitor management). This function can be performed by
internal auditors.

 An organisation should obtain a fairness option from a qualified and independent third party (investment
bankers etc.) in the event of any material transaction involving a potential conflict of interest (eg- insider
loans, material M&A etc.) before approving it.
Fairness option will protect the board from criticism and potential legal liability from stakeholders.

 Public companies should establish an effective procedure for shareholders to communicate with the board
or its committees.

 Board compensation should include incentives to the directors to focus on long- term shareholder value.
As such, a meaningful portion of director compensation should be in the form of long- term equity. (To
better align his interest)

Operation of Board of Directors - 11

 BODs should not engage in day-to-day management activities/ micro-management. Confine its activities to

monitoring management.

 At board meetings, directors should avoid trying to put management or other directors down. They should

engage in constructive criticism, but keep discussion congenial.

 Directors must determine what information they need from management to properly monitor

management’s performance.

 Directors should develop metrics to monitor the performance of management and review them from time

to time to determine their efficacy.

 Directors must establish a record of due diligence. In case of conflicting transactions, a special committee

comprising of IDs should be formed.

 They must directly or through committees, identify the major risks of an organisation, prioritize them, and

establish internal controls and a compliance program to help ameliorate the risks.

 The board must establish a succession plan for the CEO. It can protect the organisation from consequences

of sudden death or disability of the CEO, or his ultimate retirement.

 The board must obtain an annual operating plan from management and monitor its performance. It has the

responsibility to ensure that organisation has a long- term strategic plan, and oversee implementation of the

same by management.

 Board and CEO must have clear understanding of types of decisions that can be made by management

without board approval, and those which require approval.

 When organisation is in the ‘vicinity of insolvency’, directors should seek the advice of counsel to assist them

in performing their potential fiduciary duties to creditors.

 SOX prohibits personal loans or other personal extensions of credit to the directors or CEOs of public

companies. Directors should not authorize the same.

Other CG Practices - 4

 Corporate culture is the key to CG, while the key to corporate culture is leadership from the top and a

compensation system that rewards both financial and social performance. It should be promoted.

 A whistleblower policy should be established for all organisations, in order to ensure good governance.

 All organisations should have an emergency operation plan to meet calamities (fire, explosion and the like).

 Organisations should adopt a press and media policy that sets forth the titles of the one or possibly two

individuals who have the authority to speak for the organisation. He must properly be trained for that role.