POST GRADUATE TEACHING DEPARTMENT OF LAW (AUTOMONOUS)

R.T.M. NAGPUR UNIVERSITY, NAGPUR

Dissertation

Comparison of UK Companies Act, 2006 and Indian Companies Act, 2013 with
reference to Corporate Governance.

Under the Guidance of:

PROF. PADMA CHOBE

Assistant Professor

Submitted by:

Ojas Kamthikar
LL.M IVth Semester
Group ‘D’ (Business
Law)
 ACKNOWLEDGEMENT

I, Ojas Kamthikar, takes this opportunity to express my sincere gratitude to all those
involved in the preparation, compilation and completion of this Dissertation.

I express my deep gratitude to Dr. Payal Thaorey, Head of Department., Post

Graduate Teaching Department of Law, RTMNU, Nagpur, for allowing me to undertake
this Dissertation.

I also express my gratitude and sincere thanks to my guide Prof Padma Chobe, Asst.
Prof., Post Graduate Teaching Department of Law, RTMNU, Nagpur, for her constant
guidance and supervision at every stage of this Dissertation. Her endeavor for perfection, expert
guidance and supervision at every stage of this Dissertation. She always extends full attention,
patient hearing and complete support and co-operation to me, without the present work could
not have come to light. For her keen interest, valuable, discussion, constructive criticism, timely
advice and able guidance, it has been possible on my part to plan, review and give shape to this
Dissertation.

I am also thankful to the teachers of visiting faculty of law, Department affiliated to

RTMNU, Nagpur and concerned teachers who helped me providing necessary information for
this research study.

And lastly, I express my sincere thanks to my family and friends for their valuable
support and encouragement without which this research study wouldn’t have been completed in
time.

Place: Nagpur Mr. Ojas Kamthikar

Date: LLM. 4th Semester

Group D [Business Law]

PGTDL, RTMNU, Nagpur

 DECLARATION
I certify that

a. The work contained in the thesis is original and has been done by myself under the

supervision of my supervisor.

b. The work has not been submitted to any other Institute for any degree or diploma.

c. I have conformed to the norms and guidelines given in the Ethical Code of Conduct of

the Institute.

d. Whenever I have used materials (data, theoretical analysis, and text) from other sources,

I have given due credit to them by citing them in the text of the thesis and giving their

details in the references.

e. Whenever I have quoted written materials from other sources and due credit is given to

the sources by citing them.

Date:

Place: NAGPUR
 CHAPTER - I

PART – A THEORETICAL BACKGROUND:

The word "governance" comes from the Latin verb "gubernare," which means "to steer," and

is typically used to refer to the steering of a ship. This suggests that corporate governance

involves the role of direction rather than control. A crucial and evolving component of

business is corporate governance.

Corporate Governance has come to limelight as an issue ever since people began to organize

themselves for a common purpose. Standard and Poor defined corporate governance as “the

way in which a company organizes and manages itself to ensure that all financial

stakeholders receive their fair share of a company’s earnings and assets” is increasingly a

major factor in the investment decision-making process. Poor corporate governance is often

cited as one of the main reasons why investors are reluctant, or unwilling, to invest in

companies in certain markets. It can also explain why, in some economies, the share of many

companies are “tarred with the same brush” almost a case of guilt by association.

Corporate Governance is the interaction between various participants (shareholders, board of

directors, and company's management) in shaping corporation's performance and the way it is

proceeding towards. The relationship between the owners and the managers in an

organization must be healthy and there should be no conflict between the two. The owners

must see that individual's actual performance is according to the standard performance. These

dimensions of corporate governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves

of getting a fair return on their investment. Corporate Governance clearly distinguishes

between the owners and the managers. The managers are the deciding authority. In modern

corporations, the functions/ tasks of owners and managers should be clearly defined, rather,

harmonizing.
By figuring out how to make wise strategic decisions, corporate governance refers to the

process of directing a company in the desired direction. Additionally, it addresses individual

accountability through a process that lessens the principal-agent issue in the business.

Corporate Governance has a broad scope. It includes both social and institutional aspects.

Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

Corporate governance means to steer an organization in the desired direction by determining

ways to take effective strategic decisions. It also deals with the accountability of the individuals

through a mechanism which reduces the principal-agent problem in the organization.

Corporate governance is the broad term used to describe the processes, customs, policies, laws

and institutions that direct the organizations and corporations in the way they act or administer

and control their operations. It works to achieve the goal of the organization and manages the

relationship among the stakeholders including the board of directors and the shareholders.

DEFINITIONS OF CORPORATE GOVERNANCE:

“Good corporate governance is about ‘intellectual honesty’ and not just sticking to rules

and regulations, capital flowed towards companies that practiced this type of good

governance”. - Mervyn King

“Corporate governance is the system by which business corporations are directed and

controlled. The corporate governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as, the board,

managers, shareholders and spells out the rules and procedures for making decisions on

corporate affairs. By doing this, it also provides this; it also provides the structure

through which the company objectives are set, and the means of attaining those objectives

and monitoring performance’’.

“Corporate governance is the system by which business corporations are directed and

controlled.

The corporate governance structure specifies the distribution of rights and responsibilities

amongdifferent participants in the corporation, such as, the board, managers, shareholders and

spells out the rules and procedures for making decisions on corporate affairs. By doing this, it

also provides this; it also provides the structure through which the company objectives are set,

and the means of attaining those objectives and monitoring performance.

SALIENT FEATURES OF CORPORATE GOVERNANCE:

1) Good corporate governance ensures corporate success and economic growth.

2) Strong corporate governance maintains investors’ confidence, as a result of which,

company can raise capital efficiently and effectively.

3) There is a positive impact on the share price.

4) It provides proper inducement to the owners as well as managers to achieve

objectives that are in interests of the shareholders and the organization.

5) Good corporate governance also minimizes wastages, corruption, risks and

mismanagement.

6) It helps in brand formation and development.

7) It ensures organization in managed in a manner that fits the best interests of all.
NEED FOR CORPORATE GOVERNANCE:

(a) Corporate Performance: Improved governance structures and processes ensure

quality decision-making, encourage effective succession planning for senior

management and enhance the long-term prosperity of companies, independent of the

type of company and its sources of finance. This can be linked with improved

corporate performance- either in terms of share price or profitability.

(b) Enhanced Investor Trust: As individuals and institutions invest capital directly or

through intermediary funds, they look to see if wellgoverned corporate boards are there

to protect their interests. Investors who are provided with high levels of disclosure and

transparency such as relating to data on matters such as pay governance, pay

components, performance goals, and the rationale for pay decisions etc. are likely to

invest openly in those companies.

(c) Better Access to Global Market: Good corporate governance systems attract

investment from global investors, which subsequently leads to greater efficiencies in

the financial sector. The relation between corporate governance practices and the

increasing international character of investment is very important. International flows

of capital enable companies to access financing from a much larger pool of investors.

In order to reap the full benefits of the global capital market and attract long-term

capital, corporate governance arrangements must be credible, well understood across

borders and should adhere to internationally accepted principles. On the other hand,

even if corporations do not rely primarily on foreign sources of capital, adherence to

good corporate governance practices helps improve the confidence of domestic

investors, reduces the cost of capital, enables good functioning of financial markets and

ultimately leads to more stable sources of finance.

(d) Combating Corruption: Companies that are transparent, and have sound system

that provide full disclosure of accounting and auditing procedures, allow transparency

in all business transactions, provide environment where corruption would certainly

fade out. Corporate Governance enables a corporation to -compete more efficiently and

prevent fraud and malpractices within the organization.

(e) Easy Finance from Institutions: Several structural changes like increased role of

financial intermediaries and institutional investors, size of the enterprises, investment

choices available to investors, increased competition, and increased risk exposure have

made monitoring the use of capital more complex thereby increasing the need of Good

Corporate Governance. Evidences indicate that well-governed companies receive

higher market valuations. The credit worthiness of a company can be trusted on the

basis of corporate governance practiced in the company.

(f) Enhancing Enterprise Valuation: Improved management accountability and

operational transparency fulfill investors’ expectations and confidence on management

and corporations, and in return, increase the value of corporations.

(g) Reduced Risk of Corporate Crisis and Scandals: Effective Corporate

Governance ensures efficient risk mitigation system in place. A transparent and

accountable system makes the Board of a company aware of the majority of the mask

risks involved in a* particular strategy, thereby, placing various control systems in

place to facilitate the monitoring of the related issues.

(h) Accountability: Investor relations are essential part of good corporate governance.

Investors directly/ indirectly entrust management of the company to create enhanced

value for their investment.

 The company is hence obliged to make timely disclosures on regular basis to all its

shareholders in order to maintain good investor relation. Good Corporate Governance

practices create the environment whereby Boards cannot ignore their accountability to

these stakeholders.

ELEMENTS / SCOPE OF GOOD CORPORATE GOVERNANCE:

1) Role and powers of Board: Good governance is decisively the manifestation of

personal beliefs and values which configure the organizational values, beliefs and

actions of its Board. The board is the primary direct stakeholder influencing corporate

governance. Directors are elected by shareholders or appointed by other board members

and are tasked with making important decisions, such as corporate officer appointments,

executive compensation and dividend policy.

The Board's principal role is to make sure that value is being created for its stakeholders.

The lack of a clearly defined role and set of powers for the Board impairs the system of

accountability and jeopardies the accomplishment of organizational objectives. As a

result, the primary prerequisite of effective governance is the clear identification of the

Board's, CEO's, and Chairman of the Board's powers, functions, responsibilities, and

accountability. A Board Charter should be crystal clear about the Board's

responsibilities.

2) Legislation: Effective corporate governance depends on legislation and rules that are

clear and explicit. Legislation that needs ongoing legal interpretation or is challenging to

understand on a daily basis may be the target of intentional manipulation or

unintentional misreading.

3) Management Environment: Establishing clear objectives and an ethical framework,

following procedures, ensuring accountability and transparency, implementing sound

business planning, encouraging business risk assessment, having the right people and

the right resources are all part of the management environment. Creating clear
 guidelines for acceptable behavior, developing performance assessment metrics,

assessing performance, and adequately recognizing individual and group contributions

are all important aspects of doing the duties.

4) Board skills: The Board must have the right combination of characteristics, abilities,

expertise, and experience to carry out its duties successfully and efficiently. Each

director should contribute in a meaningful way. A board should include a variety of the

following abilities, information, and expertise, knowledge of government and regulatory

requirements, dedication to establishing leadership, financial and legal competence, and

operational or technological expertise.

5) Board Appointments: The Board posts should be filled via a thorough search

procedure in order to guarantee that the most qualified individuals are selected to the

Board. Both the appointment of new directors and director reappointments must follow

a clear, transparent process.

The appointment process must meet all legal and administrative standards.

Understanding the board's skill needs should be a top focus, especially when choosing a

candidate to be a new director. A formal letter of appointment outlining each new

director's responsibilities should be sent to them.

6) Board Induction And Training Directors must have a broad understanding of the area

of operation of the company’s business, corporate strategy and challenges being faced

by the Board. Attendance at continuing education and professional development

programmes is essential to ensure that directors remain abreast of all developments,

which are or may impact on their corporate governance and other related duties.

7) Board Independence: Independent Board is essential for sound corporate governance.

This goal may be achieved by associating sufficient number of independent directors

with the Board. Independence of directors would ensure that there are no actual or

perceived conflicts of interest. It also ensures that the Board is effective in supervising

and, where necessary, challenging the activities of management. The Board needs to be
 capable of assessing the performance of managers with an objective perspective.

Accordingly, the majority of Board members should be independent of both the

management team and any commercial dealings with the company.

8) Board Meetings: Directors must devote sufficient time and give due attention to meet

their obligations. Attending Board meetings regularly and preparing thoroughly before

entering the Boardroom increases the quality of interaction at Board meetings. Board

meetings are the forums for Board decision-making. These meetings enable directors to

discharge their responsibilities. The effectiveness of Board meetings is dependent on

carefully planned agendas and providing relevant papers and material to directors

sufficiently prior to Board meetings.

9) Code of Conduct: It is essential that the organization’s explicitly prescribed norms of

ethical practices and code of conduct are communicated to all stakeholders and are

clearly understood and followed by each member of the organization. Systems should be

in place to periodically measure, evaluate and if possible recognize the adherence to

code of conduct.

10) Strategy Setting: The objectives of the company must be clearly documented in a

long-term corporate strategy including an annual business plan together with achievable

and measurable performance targets and milestones.

11) Business and Community Obligations: Though basic activity of a business entity is

inherently commercial yet it must also take care of community’s obligations.

Commercial objectives and community service obligations should be clearly

documented after approval by the Board. The stakeholders must be informed about the

proposed and ongoing initiatives taken to meet the community obligations.

12) Financial And Operational Reporting: The Board requires comprehensive, regular,

reliable, timely, correct and relevant information in a form and of a quality that is

appropriate to discharge its function of monitoring corporate performance. For this

 purpose, clearly defined performance measures - financial and non-financial should be

prescribed which would add to the efficiency and effectiveness of the organization. The

reports and information provided by the management must be comprehensive but not so

extensive and detailed as to hamper comprehension of the key issues. The reports should

be available to Board members well in advance to allow informed decision-making.

Reporting should include status report about the state of implementation to facilitate the

monitoring of the progress of all significant Board approved initiatives.

13) Monitoring The Board Performance: The Board must monitor and evaluate its

combined performance and also that of individual directors at periodic intervals, using

key performance indicators besides peer review. The Board should establish an

appropriate mechanism for reporting the results of Board’s performance evaluation

results.

14) Audit Committees: The Audit Committee is inter alia responsible for liaison with the

management; internal and statutory auditors, reviewing the adequacy of internal control

and compliance with significant policies and procedures, reporting to the Board on the

key issues. The quality of Audit Committee significantly contributes to the governance

of the company.

15) Risk Management: Risk is an important element of corporate functioning and

governance. There should be a clearly established process of identifying, analyzing and

treating risks, which could prevent the company from effectively achieving its

objectives. It also involves establishing a link between risk-return and resourcing

priorities. Appropriate control procedures in the form of a risk management plan must

be put in place to manage risk throughout the organization. The plan should cover

activities as diverse as review of operating performance, effective use of information

technology, contracting out and outsourcing.

CORPORATE GOVERNANCE THEORIES:

A) Agency Theory: According to this theory, managers act as ‘Agents’ of the corporation.

The owners set the central objectives of the corporation. Managers are responsible for

carrying out these objectives in day-to-day work of the company. Corporate Governance

is control of management through designing the structures and processes. In agency

theory, the owners are the principals. But principals may not have knowledge or skill for

getting the objectives executed. Thus, principal authorizes the mangers to act as

‘Agents’ and a contract between principal and agent is made. Under the contract of

agency, the agent should act in good faith. He should protect the interest of the principal

and should remain faithful to the goals. In modern corporations, the shareholdings are

widely spread.

The management (the agent) directly or indirectly selected by the shareholders (the

Principals), pursue the objectives set out by the shareholders. The main thrust of the

Agency Theory is that the actions of the management differ from those required by the

shareholders to maximize their return. The principals who are widely scattered may not

be able to counter this in the absence of proper systems in place as regards timely

disclosures, monitoring and oversight. Corporate Governance puts in place such systems

of oversight. Agency theory examines the relationship between the agents and principals

of the business. There are two parties – the agent and principal, whereby the former acts

and takes decisions on behalf of the latter in an agency relationship. The theory revolves

around the relationship between the two and the issues that may exist due to their

different risk perspectives and business goals. The most talked-about agency

relationship exists between shareholders and executives of a corporation, in finance,

where the top brass is elected to act in the interest of the company’s true owners. 
 Agency theory in Corporate Governance identifies the agency problem and it specifies

mechanisms which help to reduce agency loss which can occur due to agency problem.

B) Stockholder Theory: According to this theory, it is the corporation which is considered

as the property of shareholders/ stockholders. They can dispose of this property, as they

like. They want to get maximum return from this property. The owners seek a return on

their investment and that is why they invest in a corporation. But this narrow role has

been expanded into overseeing the operations of the corporations and its mangers to

ensure that the corporation is in compliance with ethical and legal standards set by the

government. So the directors are responsible for any damage or harm done to their

property i.e., the corporation. The role of managers is to maximize the wealth of the

shareholders. They, therefore should exercise due diligence, care and avoid conflict of

interest and should not violate the confidence reposed in them. The agents must be

faithful to shareholders.

C) Stakeholder Theory: According to this theory, the company is seen as an input-output

model and all the interest groups which include creditors, employees, customers,

suppliers, local-community and the government are to be considered. From their point

of view, a corporation exists for them and not the shareholders alone. The different

stakeholders also have a self-interest. The interests of these different stakeholders are at

times conflicting. The managers and the corporation are responsible to mediate between

these different stakeholder’s interest. The stake holders have solidarity with each other.

This theory assumes that stakeholders are capable and willing to negotiate and bargain

with one another. This results in long term self-interest. The role of shareholders is

reduced in the corporation. But they should also work to make their interest compatible

with the other stake holders. This requires integrity and managers play an important role

here. They are faithful agents but of all stakeholders, not just stockholders.
D) Stewardship Theory: The word ‘steward’ means a person who manages another’s

property or estate. Here, the word is used in the sense of guardian in relation to a

corporation, this theory is value based. The managers and employees are to safeguard

the resources of corporation and its property and interest when the owner is absent. They

are like a caretaker. They have to take utmost care of the corporation. They should not

use the property for their selfish ends. This theory thus makes use of the social approach

to human nature. The managers should manage the corporation as if it is their own

corporation. They are not agents as such but occupy a position of stewards. The

managers are motivated by the principal’s objective and the behavior pattern is

collective, pro-organizational and trustworthy.

Thus, under this theory, first of all values as standards are identified and formulated. Second

step is to develop training programmers that help to achieve excellence. Thirdly, moral

support is important to fill any gaps in values.

E) Resource dependency theory: This theory deals with the resources required by a

company to fulfil its targets and dealings. The board of directors has the responsibility

of providing necessary resources like skills, human resources, capital, information,

technology, etc. to the company with the help of their links and relations. They act as

links between external and internal environments. If all the resources were provided

well within time, it would help in increasing the efficiency and performance of a

company. Directors also provide suppliers, vendors, policymakers, and other necessary

requirements to a company and can be classified into 4 different categories. These are

insiders, experts, specialists, and influential people in the community for

promotion. This theory was developed by Jeffry Pfeffer (an American business theorist)

and Gerald R. Salancik (American organizational theorist). The theory has an impact on

the structure of a company, the appointment of members of the board, strategies related

to production and marketing, the structure of contracts and other strategies of a

company. According to this theory, if the appointment of employees is done outside of

the company, it will have an effect on the behavior of already employed people in the

company. 

F) Transaction Cost theory: According to this theory, every contract made by a company

has a value attached to it. This cost is also associated with the third or external party

with whom the contract is made. This cost is known as the “transaction cost.” If the

transaction cost of using a market or the cost of a contract is higher, then it is undertaken

by a company. This theory tries to explain the aim behind the formation of a company

and the reason for the expansion of business.

 According to this theory, the aim is to minimize the transaction costs of the environment

and bureaucratic costs within it. Another argument is that when the external transaction

cost is higher than the internal bureaucratic cost, it will affect the growth of a company

as the cost of its affairs will be cheaper than usual. The growth of a company can only

be achieved if it uses cheaper resources to fulfil its operations rather than costly

resources that will result in the failure of operations and obligations.

G) Political Theory: This theory states that there must be an approach to developing the

support of shareholders by way of a vote. All the profits and benefits gained by a

company are also determined and affected by policies and strategies of the government

that favour the growth of a company and the expansion of the market.
COMMITTEES OF CORPORATE GOVERNANCE:

1) Cadbury Committee: The Committee on the Financial Aspects of Corporate

Governance, forever known as the Cadbury Committee, was established in May

1991 by the Financial Reporting Council, of the London Stock Exchange, under the

chairmanship of Sir Adrian Cadbury for studying and giving recommendations of the

Corporate Governance. The Committee was originally named as The Committee on the

Financial Aspects of Corporate Governance". The Committee had given a

recommendation that sets out recommendations on the arrangement of company boards

and accounting systems to mitigate corporate governance risks and failures. The aim of

the Cadbury Committee was to improve the standard of corporate governance in Britain.

The Objectives of Cadbury Committee Report:

(i) Uplift the low level of confidence both in financial reporting and in the ability of

auditors to provide the safeguards which the users of company’s reports sought and

expected;

(ii) Review the structure, rights and roles of board of directors, shareholders and

auditors by making them more effective and accountable;

(iii) Address various aspects of accountancy profession and make appropriate

recommendations, wherever necessary.

(iv) Raise the standard of corporate governance; etc.

 Reasons for setting up the Cadbury Committee.
1. The committee was set up in May 1991 by the Financial Reporting Council, the London Stock
Exchange and the accountancy profession to, address the financial aspects of corporate
governance. The Committee’s membership and terms of reference are set out in Append. Its
sponsors were concerned at the perceived low level of confidence both in financial reporting
and in the ability of auditors provide the safeguards, which the users of company reports sought
and expected
These concerns about the working of The corporate system were heightened by some
unexpected failures of major’ companies and by criticism of the lack of effective board
accountability for such matters directors pay. Further evidence of the breadth of feeling that
action had to be taken to clarity responsibilities and to raise standards came from a number of
reports, on different aspects of corporate governance which had either been published or were
in preparation at that time.
The committee wherever possible drew on these documents, and a wide range of submissions
from interested parties, in producing its draft report which was issued for public comment on 27
May, 1992.
1. Since then, the committee has received over 200 written responses to its proposals, the great
majority of which broadly support the committee’s approach, and has carefully considered the
balance of opinions expressed on particular issue. The committee is most grateful to all those
who have taken the time and trouble to give us their comments. They have helped to shape our
final report and, in addition, they are a valuable reference source for our successors.
2. Corporate governance is the system by which companies are directed and controlled. Board of
directors is responsible for the governance of their companies. The shareholder’s role in
governance is to appoint the directors and the auditors and to satisfy themselves that an
appropriate governance in place.
3. Within that overall framework, the specifically financial aspect of corporate governance (the
Committee’s remit) are the way in which boards set financial policy and oversee its
implementation, including the use of financial controls, and the process whereby they report on
the activities and progress of the company to the shareholders.
4. The role of the auditors is to provide the shareholders with an external and objective check on
the director’s financial statements, which form the basis of that reporting system. Although the
reports of the directors are addressed to the shareholders, they are important to a wider
audience, not least to employees whose interest’s boards have a statutory duty to take into
account.
5. The committee’s objective is to help to raise the standard corporate governance and the level of
confidence in financial reporting and auditing by setting out clearly what it sees as the
respective responsibilities of those involved and what it believes is expected of them.
Parts of Cadbury Committee Report:

The Cadbury Committee Report mainly consisted of Three Parts.

 Reviewing the structure and responsibilities of Boards of Directors and

recommending a Code of Best Practice The boards of all listed companies should
comply with the Code of Best Practice. All listed companies should make a statement
about their compliance with the Code in their report and accounts as well as give
reasons for any areas of non-compliance. The Code of Best Practice is segregated into
four sections and their respective recommendations are: - 

1. Board of Directors - The board should meet regularly, retain full and effective
control over the company and monitor the executive management. There should
be a clearly accepted division of responsibilities at the head of a company, which
will ensure a balance of power and authority, such that no one individual has
unfettered powers of decision. Where the chairman is also the chief executive, it
is essential that there should be a strong and independent element on the board,
with a recognised senior member. Besides, all directors should have access to the
advice and services of the company secretary, who is responsible to the Board
for ensuring that board procedures are followed and that applicable rules and
regulations are complied with.
2. Non-Executive Directors - The non-executive directors should bring an
independent judgement to bear on issues of strategy, performance, resources,
including key appointments, and standards of conduct. The majority of non-
executive directors should be independent of management and free from any
business or other relationship which could materially interfere with the exercise
of their independent judgment, apart from their fees and shareholding.
3. Executive Directors - There should be full and clear disclosure of directors’
total emoluments and those of the chairman and highest-paid directors, including
pension contributions and stock options, in the company's annual report,
including separate figures for salary and performance-related pay.
4. Financial Reporting and Controls - It is the duty of the board to present a
balanced and understandable assessment of their company’s position, in
reporting of financial statements, for providing true and fair picture of financial
reporting. The directors should report that the business is a going concern, with
supporting assumptions or qualifications as necessary. The board should ensure
that an objective and professional relationship is maintained with the auditors.

 Considering the role of Auditors and addressing a number of recommendations to

the Accountancy Profession 

The annual audit is one of the cornerstones of corporate governance. It provides

an external and objective check on the way in which the financial statements
have been prepared and presented by the directors of the company. The Cadbury
Committee recommended that a professional and objective relationship between
the board of directors and auditors should be maintained, so as to provide to all a
true and fair view of company's financial statements. Auditors' role is to design
audit in such a manner so that it provides a reasonable assurance that the
financial statements are free of material misstatements. Further, there is a need to
develop more effective accounting standards, which provide important reference
 points against which auditors exercise their professional judgement.

Secondly, every listed company should form an audit committee which gives the
auditors direct access to the non-executive members of the board. The
Committee further recommended for a regular rotation of audit partners to
prevent unhealthy relationship between auditors and the management. It also
recommended for disclosure of payments to the auditors for non-audit services to
the company. The Accountancy Profession, in conjunction with representatives
of preparers of accounts, should take the lead in: - (i) developing a set of criteria
for assessing effectiveness; (ii) developing guidance for companies on the form
in which directors should report; and (iii) developing guidance for auditors on
relevant audit procedures and the form in which auditors should report.
However, it should continue to improve its standards and procedures.

 Dealing with the Rights and Responsibilities of Shareholders 

The shareholders, as owners of the company, elect the directors to run the
business on their behalf and hold them accountable for its progress. They appoint the
auditors to provide an external check on the directors’ financial statements. The
Committee's report places particular emphasis on the need for fair and accurate
reporting of a company's progress to its shareholders, which is the responsibility of the
board. It is encouraged that the institutional investors/shareholders to make greater use
of their voting rights and take positive interest in the board functioning. Both
shareholders and boards of directors should consider how the effectiveness of general
meetings could be increased as well as how to strengthen the accountability of boards of
directors to shareholders.