Key Recommendations of Narayan Murthy Committee on Corporate Governance

The Committee on Corporate Governance, headed by Shri Narayanmurthy was constituted by SEBI, to evaluate the existing corporate governance practices and to improve these practices as the standards themselves were evolving with market dynamics. The committee’s recommendations are based on the relative importance, fairness, accountability, transparency, ease of implementation, verifiability and enforceability related to audit committees, audit reports, independent directors, related parties, risk management, directorships and director compensation, codes of conduct and financial disclosures.

The key mandatory recommendations focus on

Strengthening the responsibilities of audit committees

At least one member should be ‘financially knowledgeable’ and at least one member should have accounting or related financial management proficiency.

Quality of financial disclosures

Improving the quality of financial disclosures, including those related to related party transactions.

Proceeds from initial public offerings

Companies raising money through an IPO should disclose to the Audit Committee, the uses / applications of funds by major category like capital expenditure, sales and marketing, working capital, etc.

Other recommendations

• Requiring corporate executive boards to assess and disclose business risks in the annual reports of companies.
• Should be obligatory for the Board of a company to lay down the code of conduct for all Board members and senior management of a company.
• The position of nominee directors: Nominee of the Government on public sector companies shall be similarly elected and shall be subject to the same responsibilities and liabilities as other directors
• Improved disclosures relating to compensation paid to non-executive directors.

Non-mandatory recommendations include moving to a regime where corporate financial statements are not qualified; instituting a system of training of board members; and the evaluation of performance of board members.

Whistle Blower Policy

Personnel who observe an unethical or improper practice should be able to approach the audit committee without necessarily informing their superiors.

Implementation issue

A primary issue that arises with implementation is whether the recommendations should be made applicable to all companies immediately or in a phased manner, since the costs of compliance may be large for certain companies.

Another issue is whether to extend the applicability of these recommendations to companies that are registered with BIFR. In the case of such companies, there is likely to be almost little or no trading in their shares on the stock exchanges.