Corporate Governance (CG)

1. Corporate Governance (CG) CG is the : - Application of best management practices - Compliance of law in true sense and letter spirit

2. Law comprises of not only state law but also entity's own policy and procedures, internal control mechanism and standard operating practices. • Adherence to ethical standards for effective management and distribution of wealth to all the stakeholders, and • Discharge of social responsibility for sustainable development of all stakeholders.

3. CG is not the responsibility of one individual, a unit or a small group of people of an entity, but : - it should be a corporate culture - all members within the entity should abide by it.

4. Capable of Taking Independent and Objective Decision Effective Control Over Company Affairs Structured Objectives Representation of Owners BOARD OF DIRECTORS Effectively and Regularly Monitors Management Functioning Balanced Has Effective Machinery to subserve Owners Interest Comprises of Executive, Non-executive, and Independent Directors Adopts Transparent Procedures and Practices Proper Communication with Owners Adequate IFNO Based Decisions

5. Element of Good CG • Role and Power of Board – based on corporate : - Values - Beliefs - Action • Legislations/Regulations – Unambiguous

6. Management Environment - Clear Objectives - Appropriate Ethical Frameworks (DOs/DONTs) - Detailed System Operating Procedure - Transparent Activities - Concise Responsibility and Accountability - Sound Business Plan - Proper Risk Analysis - Right People at the Right Place - Staff Performance Assessment Based Reward/Punishment System - Recognition of Individual and Group Contribution

7. COMPETENT BOARD - Operational/Technical Expertise - Commitment to establish leadership - Financial/Accounting/Legal Knowledge - Knowledge of Regulatory Requirements - Established Procedure for Appointment/Re-appointment - Members must devote sufficient time to meet their obligations

8. STRATEGY SETTING - Long/Short Term Plan including Annual Business Plan - System of Periodic Review of Budgetary Goals and Plans • REPORTING - Comprehensive, Regular, Reliable, Timely, Correct and Informative to Board/Regulating Authorities

9. AUDIT COMMITTEE - Members with required level of skill Finance Don’t : - Window Dressing - Misleading Analysis Stop and report, if any, related party transactions Attracting and Retaining talent - Investor Loyalty - Customer Satisfaction BUSINESS ETHICS System to check Insider Trading, Security Fraud Effectively and Regularly Monitor Management Functioning Rational Executive Compensation

10. Human Resource No Discrimination Sexual Harassment Positive Action Freedom of Association Whistle Blowing System Fair Employment Practice Workplace Safety and Health Marketing Proper Pricing of Products Encourage Anti-Competitive Practices Misleading Advertisement Children and Marketing Black Marketing Production No Defective, Addictive and inherently dangerous products Save Environment Quality Test System

11. FACTORS INFLUENCING QUALITY "CG" - Integrity of Management - Ability of the Board - Adequacy of Process/Procedures - Quality Corporate Reporting - Participation of Stakeholders in the Management

12. OUTCOME OF GOOD "CG" - Efficient, effective and sustainable entity - Contributes to the welfare of the society by creating : * Wealth * Employment; and * Solutions to Emerging Challenges - Makes an entity responsive and accountable - Commands investors' trust and confidence - Stakeholders are fairly rewarded.

13. LIFTING OF CORPORATE VEIL • Company, corporations are legal persons and possess separate legal personality than that of its shareholders/directors. • Company corporations are solely responsible for the debts they incur and the sole beneficiary of assets owed to it • But in exceptional cases corporate veil is lifted.

14. Simple Example • A director left a company having contract not to compete with it. • Short while launches a company under his effective control. • New company competes with the old company. • Technically it would be new company competing with the old one. • But the court may hold new company as a "sham" or "fraud" and may convict the "director" for breaching the contract with the old company.

15. Court looking beyond the legal personality or legal fiction to the reality of the situation is lifting corporate veil. • Case of N.S.M. as appearing in the news. • In exceptional situation separate legal entity of com./corporation is ignored and natural persons behind it is made responsible for the action taken on behalf of the company. • Spirit of lifting of corporate veil is also expressively incorporated in Sec. 163 and indirectly in some other sections as well.

16. So, precedent or ruling has been made by the Supreme Court of Nepal in this respect. • Easier to lift the corporate veil in case closely held companies compared to widely held companies. • UK System most conservative in this respect. • US : most litigated issue in corporate law, courts are conservative.

17. Factors supporting the court in lifting corporate veil : - Absence or inaccuracy of records. - Concealment or misrepresentation of members - Suspicious transactions with related parties (GDB) - Failure to observe corporate formalities like reporting - Failure to pay dividends - Intermingling of assets of the company and of the shareholders - Manipulation of Assets - Siphoning of corporate funds by dominant shareholders, etc.

18. Pushpa Raj Pandey vs. Tax Office (2040 B.S.) : Tax Office requested for lifting corporate veil but Supreme Court denied. • Purushottam Acharya vs. Boris Restaurant Pvt. Ltd. (2044 B.S.) • S.L. Agrawal vs. Nepal Lever Ltd. (2056 B.S.)