Emerging issues in company law

Corporate Governance
Corporate governance is the term used to describe the balance among participants in the
corporate structure who have an interest in the way in which the corporation is run, such as
executive staff, shareholders and members of the community. Corporate governance directly
impacts the profits and reputation of the company, and having poor policies can expose the
company to lawsuits, fines, reputational damage, and loss of capital investment. Here are five
common pitfalls your corporate governance policies should avoid.

1) CONFLICTS OF INTEREST
Avoiding conflicts of interest is vital. A conflict of interest within the framework of corporate
governance occurs when an officer or other controlling member of a corporation has other
financial interests that directly conflict with the objectives of the corporation. For example, a
board member of a solar company who owns a significant amount of stock in an oil company
has a conflict of interest because, while the board he or she serves on represents the
development of clean energy, they have a personal financial stake in the success of the oil
industry. When conflicts of interest are present, they deteriorate the trust of shareholders and
the public while making the corporation vulnerable to litigation.

2) OVERSIGHT ISSUES
Effective corporate governance requires the board of directors to have substantial oversight of
the company’s procedures and practices. Oversight is a broad term that encompasses the
executive staff reporting to the board and the board’s awareness of the daily operations of the
company and the way in which its objectives are being achieved. The board protects the
interests of the shareholders, acting as a check and balance against the executive staff.
Without this oversight, corporate staff might violate state or federal law, facing substantial
fines from regulatory agencies, and suffering reputational damage with the public.

3) ACCOUNTABILITY ISSUES
Accountability is necessary for effective corporate governance. From the top-level executives
to lower-tier employees, each level and division of the corporation should report and be
accountable to another as a system of checks and balances. Above all else, the actions of each
level of the corporation is accountable to the shareholders and the public. Without
accountability, one division of the corporation might endanger the success of the entire
company or cause stockholders to lose the desire to continue their investment.

4) TRANSPARENCY
To be transparent, a corporation must accurately report their profits and losses and make
those figures available to those who invest in their company. Overinflating profits or
minimizing losses can seriously damage the company’s relationship with stockholders in that
they are enticed to invest under false pretenses. A lack of transparency can also expose the
company to fines from regulatory agencies.

5) ETHICS VIOLATIONS
Members of the executive board have an ethical duty to make decisions based on the best
interests of the stockholders. Further, a corporation has an ethical duty to protect the social
welfare of others, including the greater community in which they operate. Minimizing
pollution and eschewing manufacturing in countries that don’t adhere to similar labor
standards as the U.S. are both examples of a way in which corporate governance, ethics, and
social welfare intertwine
Clause 49
What is Clause 49 of the Listing Agreement
Every company wishing to list its securities on a stock exchange has to sign an agreement
with the latter, called the Listing Agreement. It has 51 clauses. These deal with various
guidelines on listing and responsibilities of the company management. Clause 49, one of the
longest, deals with corporate governance. It lists mandatory and non-mandatory norms for
companies to comply with.
Why has Sebi amended Clause 49
Since publication of the Cadbury committee (1991) report in the UK, there has been a lot of
emphasis on corporate governance worldwide. Later reports the Greenbury committee
(1995), the Combined Code of the London Stock Exchange, the OECD Code on Corporate
Governance, Hampel committee (1998) and the Blue Ribbon Committee (1999)all underlined
the point. In India, the Confederation of Indian Industry (CII) published Desirable Corporate
GovernanceA Code (1998). Sebi appointed a committee chaired by Kumar Mangalam Birla
to formulate a code. To give effect to the Birla report (1999), Sebi amended Clause 49 in
February 2000.
In 2003, Sebi appointed another panel under the chairmanship of NR Narayana Murthy to
look anew at the issues. Based on views expressed by this and other committees, including
the Naresh Chandra panel appointed by the department of company affairs, Sebi in October
2004 announced its decision to replace Clause 49 with a revised one, to further strengthen
corporate governance. Initially, it asked stock exchanges to ensure listed companies complied
with the new clause by April 1, 2005. This was later extended to December 31, 2005.
What are the major requirements of Clause 49
These are: Mandatory guidelines pertaining to the board of directors, audit panels, subsidiary
companies, disclosures, certification by CEO/CFO and report on corporate governance and
compliance. At least half the board must be non-executive or independent directors (IDs).
And, at least two-thirds of the audit committee should be IDs. All audit committee members
should be financially literate. The board must meet at least four times a year, with a
maximum gap of four months between meetings. The same rule applies to audit panels.
A listed company also has to specify a code of conduct for all board members and senior
management and put these on the company website.

CSR
Human Rights
An enterprise’s responsibility to respect human rights relates to internationally recognised
human rights, particularly those of the United Nations. Human rights due diligence enables
enterprises to identify any adverse effects resulting from its activities and in its value chain in
good time and to prevent or reduce them. The shape it takes in practice depends above all on
the size of the enterprise and on certain risk factors such as the region and sector.
Working Conditions
By ensuring the best possible employment conditions based on the applicable statutory
provisions and international labour standards, in particular those of the International Labour
Organization, enterprises can play a role in creating high-quality jobs. This primarily
concerns the granting of trade union rights, the abolition of child and forced labour and the
elimination of employee discrimination (e.g. based on where they come from, their social
background, skin colour, religion or political views). Constructive cooperation with social
partners is also an important part of this.
The Environment
Responsible environmental management aims to continuously improve an enterprise’s impact
on the environment. This includes a progressive internal environmental management system
based on high standards, environmental due diligence, an environmentally friendly strategy
with closed cycles, consistent reduction of greenhouse gas emissions and a contingency plan
for reducing harmful effects on the environment.
Combating Corruption
Corruption has an extremely harmful effect on democratic institutions, good corporate
governance, investments and international competition. Enterprises can play a key role in
combating corruption by introducing internal control mechanisms to avoid and expose it. It is
also important to publish the policy on combating corruption supported by the management
and to train employees.
Disclosing Information
As part of a transparent reporting process, enterprises inform the public about their business
activities and their effects in terms of the economy, society and the environment. The regular,
timely and pertinent disclosure of information improves an enterprise’s transparency and
credibility. The reporting process also gains the trust of the enterprise’s stakeholders (e.g.
shareholders, financial institutions, employees and interest groups) and can facilitate access
to capital.

Insider Trading
Insider trading is the trading of a public company's stock or other securities (such as bonds or
stock options) based on material, nonpublic information about the company. In various
countries, some kinds of trading based on insider information is illegal. This is because it is
seen as unfair to other investors who do not have access to the information, as the investor
with insider information could potentially make larger profits than a typical investor could
make. The rules governing insider trading are complex and vary significantly from country to
country. The extent of enforcement also varies from one country to another. The definition of
insider in one jurisdiction can be broad, and may cover not only insiders themselves but also
any persons related to them, such as brokers, associates, and even family members. A person
who becomes aware of non-public information and trades on that basis may be guilty of a
crime.

Trading by specific insiders, such as employees, is commonly permitted as long as it does not
rely on material information not in the public domain. Many jurisdictions require that such
trading be reported so that the transactions can be monitored. In the United States and several
other jurisdictions, trading conducted by corporate officers, key employees, directors, or
significant shareholders must be reported to the regulator or publicly disclosed, usually
within a few business days of the trade. In these cases, insiders in the United States are
required to file a Form 4 with the U.S. Securities and Exchange Commission (SEC) when
buying or selling shares of their own companies. The authors of one study claim that illegal
insider trading raises the cost of capital for securities issuers, thus decreasing overall
economic growth.[1] However, some economists, such as Henry Manne, have argued that
insider trading should be allowed and could, in fact, benefit markets.[2]

There has long been "considerable academic debate" among business and legal scholars over
whether or not insider trading should be illegal.[3] Several arguments against outlawing
insider trading have been identified: for example, although insider trading is illegal, most
insider trading is never detected by law enforcement, and thus the illegality of insider trading
might give the public the potentially misleading impression that "stock market trading is an
unrigged game that anyone can play."[3] Some legal analysis has questioned whether insider
trading actually harms anyone in the legal sense, since some have questioned whether insider
trading causes anyone to suffer an actual "loss," and whether anyone who suffers a loss is
owed an actual legal duty by the insiders in question.[3]