Corporate Governance of ITC Ltd

Submitted By: Jugakalpa Das

Manish Agarwal
Medha Sharma
Nand Kumar
Santosh Dharwar
Corporate Governance
Corporate governance is the set of processes, customs, policies, laws, and institutions
affecting the way a corporation (or company) is directed, administered or controlled.
Corporate governance also includes the relationships among the many stakeholders
involved and the goals for which the corporation is governed. The principal stakeholders are
the shareholders, the board of directors, employees, customers, creditors, suppliers, and the
community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate
governance is to ensure the accountability of certain individuals in an organization through
mechanisms that try to reduce or eliminate the principal-agent problem. A related but
separate thread of discussions focuses on the impact of a corporate governance system in
economic efficiency, with a strong emphasis on shareholders' welfare.

Principles of Corporate Governance

Key elements of good corporate governance principles include honesty, trust and integrity,
openness, performance orientation, responsibility and accountability, mutual respect, and
commitment to the organization. Commonly accepted principles of corporate governance
include:

Rights and equitable treatment of shareholders

Interests of other stakeholders
Role and responsibilities of the board
Integrity and ethical behavior
Disclosure and transparency
Mechanisms and Controls
Corporate governance mechanisms and controls are designed to reduce the inefficiencies
that arise from moral hazard and adverse selection.

Internal Corporate Governance Controls

Internal corporate governance controls monitor activities and then take corrective
action to accomplish organizational goals. Examples include:
 Monitoring by the board of directors: The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards invested capital.
Regular board meetings allow potential problems to be identified, discussed and
avoided. Whilst non-executive directors are thought to be more independent, they
may not always result in more effective corporate governance and may not increase
performance
 Internal control procedures and internal auditors: Internal control procedures are
policies implemented by an entity's board of directors, audit committee,
management, and other personnel to provide reasonable assurance of the entity
achieving its objectives related to reliable financial reporting, operating efficiency,
and compliance with laws and regulations. Internal auditors are personnel within an
organization who test the design and implementation of the entity's internal control
procedures and the reliability of its financial reporting
 Balance of power: The simplest balance of power is very common; require that the
President be a different person from the Treasurer. This application of separation of
power is further developed in companies where separate divisions check and balance
each other's actions.
 Remuneration: Performance-based remuneration is designed to relate some
proportion of salary to individual performance. It may be in the form of cash or non-
cash payments such as shares and share options, superannuation or other benefits.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders

exercise over the organisation. Examples include:

 Competition
 Government
 Customers
 Auditors
 Suppliers
 Community
ITC: Company Background

ITC is one of India's foremost private sectors companies with a market capitalization of
nearly US $ 22 billion and a turnover of over US $ 6 billion. ITC is rated among
the World's Best Big Companies, Asia's 'Fab 50' and the World's Most Reputable
Companies by Forbes magazine, among India's Most Respected Companies by Business
World and among India's Most Valuable Companies by Business Today.
ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty
Papers, Packaging, Agri- Business, Packaged Foods & Confectionery, Information
Technology, Branded Apparel, Greeting Cards, Safety Matches and other FMCG
products. While ITC is an outstanding market leader in its traditional businesses of
Cigarettes, Hotels, Paperboards, Packaging and Agri-Exports, it is rapidly gaining market
share even in its nascent businesses of Packaged Foods & Confectionery, Branded
Apparel and Greeting Cards.
As one of India's most valuable and respected corporations, ITC is widely
perceived to be dedicatedly nation-oriented. ITC's diversified status originates from its
corporate strategy aimed at creating multiple drivers of growth anchored on its time-
tested core competencies: unmatched distribution reach, superior brand-building
capabilities, effective supply chain management and acknowledged service skills in
hotelier. Over time, the strategic forays into new businesses are expected to garner a
significant share of these emerging high-growth markets in India.
ITC's Agri-Business is one of India's largest exporters of agricultural products.
The Company's 'e- Choupal' initiative is enabling Indian agriculture significantly
enhance its competitiveness by empowering Indian farmers through the power of the
Internet.
ITC employs over 26,000 people at more than 60 locations across India. The
Company continuously endeavors to enhance its wealth generating capabilities in a
globalizing environment to consistently reward more than 3, 95,000 shareholders, fulfil
the aspirations of its stakeholders and meet societal expectations.
ITC was the first company in India to voluntarily seek a corporate governance
rating. On August 24, 2010 , ITC completed 100 years of its operations.
 Areas of Diversification

ITC has transformed itself from a leading cigarette manufacturer to an umbrella group that
offers a diversified product mix to enhance its brand image and reduce dependency on
tobacco related products. It has forayed into the hospitality service industry and has
become a major player in the hotels segment. Its position in the FMCG (fast moving
consumer goods) business is also on a growth curve; especially its confectionery and
biscuits which are slated to achieve the top ranks among its peers. It has made heavy
investments to strengthen its IT (information technology) segment and to compete with the
big players like Infosys and Wipro. Although the ITC group is marketing its image as an
ideal corporate citizen and a company that takes its social responsibility seriously, it still
earns 80% of revenues from selling cigarettes and other tobacco related products. The major
areas in which ITC has diversified are:

FMCG
 Cigarettes
 Food
 Lifestyle Retailing
 Greetings and stationery
 Safety Matches
 Incense sticks

Hotels

Paperboards and Packaging

 Paperboards and specialty papers
 Packaging

Agri-Business
 Agri- exports
 E-choupal

Information Technology
ITC: CULTURE

ITC’s Vision
Sustain ITC‟s position as one of India‟s most valuable corporations through world class
performance
Create growing value for the Indian stakeholders and the company‟s stakeholders.

ITC’s Mission
To enhance the wealth generating capability of the enterprise in the globalizing
environment.
Deliver superior and sustainable stakeholder‟s value.

ITC’s Core Values

The company‟s Core Values are aimed at developing a performance-oriented organization
that is highly customer focused and also creates value for those holding stake in it. It fully
understands that it has a commitment to its stakeholders to act as a guardian of the company
from stakeholder‟s point of view and deliver results in a manner that actualizes stakeholder‟s
interest on a long-term basis.
It also delivers on the commitment to its customers by consistently addressing their needs on
product quality, value and overall satisfaction. It respects the values of people and
also encourages individuals to pursue their dreams, values their differences and helps them
to experiment in the pursuit of various opportunities.
ITC firmly believes in the concept of Excellence with their mantra being, “we do what
is right, do it well and win. We will strive for excellence in whatever we do”. It is constantly in
the pursuit of better and newer products, processes, services and management practices.
Apart from the interest of shareholders they also address their commitment to the nation to
generate economic value, at the same time ensuring that in achieving these goals no
compromises are made whatsoever in complying with rules and regulations as specified by law.
Corporate Governance of ITC

ITC defines Corporate Governance as a systemic process by which companies are directed and
controlled to enhance their wealth generating capacity. Since large corporations employ vast
quantum of societal resources, we believe that the governance process should ensure that these
companies are managed in a manner that meets stakeholders aspirations and societal
expectations.

Core Principles

ITC's Corporate Governance initiative is based on two core principles. These are :

i. Management must have the executive freedom to drive the enterprise forward without
undue restraints; and
ii. This freedom of management should be exercised within a framework of effective
accountability.

The Corporate Governance processes of ITC are designed to support effective management of
multiple businesses while retaining focus on each one of them. The practice of Corporate
Governance in ITC takes place at three interlinked levels –

Strategic • By the Board of Directors

Supervision

Strategic • By the Corporate Management Committee

Management

Executive • By the Divisional/Strategic Business Unit(SBU)

Chief Executive assisted by the respective
Management Divisional/SBC

The role, powers and composition of the Board of Directors, Board Committees, Corporate
Management Committee and Divisional Management Committees are articulated and available
on the Company‟s corporate website.
Chair of the highest governance body
The Chairman of ITC is the Chief Executive of the Company. He is the Chairman of the Board
and the CMC. His primary role is to provide leadership to the Board and the CMC for realizing
Company goals in accordance with the charter approved by the Board.
ITC has a diversified business portfolio which demands of senior leadership an in-depth
knowledge and understanding of the functioning of the Company, so as to enhance the value-
generating capacity of the organisation and contribute significantly to stakeholders‟ aspirations
and societal expectations. The Chairman of the Company, therefore, is chosen from the
Executive management.
Internal Corporate Governance

Board of Directors (Board)

The ITC Board is a balanced Board, comprising Chairman, 3 Executive and 8 Non-Executive
Directors (including 9 Independent Directors) as on March 31, 2010.

 Selection of Directors

ITC‟s Governance Policy stipulates that the Non-Executive Directors (including Independent
Directors) be drawn from amongst eminent professionals with experience in
business/finance/law/public enterprises. Directors are appointed/re-appointed with the approval
of the shareholders for a period of three to five years or a shorter duration in accordance with
retirement guidelines as determined by the Board from time to time. All Directors are liable to
retire by rotation unless otherwise approved by the shareholders. One-third of the Directors who
are liable to retire by rotation, retire every year and are eligible for re-election.
The selection of Executive Directors is done by the Nominations Committee, which
comprises all the Non-Executive Directors and the Chairman.

 Performance of the highest governance body

The role of the Board is to provide direction and exercise control to ensure that the Company is
managed in a manner that fulfils stakeholders‟ aspirations and societal expectations. The Board
evaluates Directors collectively to reinforce the principle of collective responsibility.

 Compensation for members of highest governance body

Remuneration of the Chairman, Executive Directors and the senior most level of management
below the Executive Directors is determined by the Board, on the recommendation of the
Compensation Committee comprising only Non-Executive Directors; remuneration of the
Directors is subject to the approval of the shareholders. Such remuneration is linked to the
performance of the Company inasmuch as the performance bonus is based on various qualitative
and quantitative performance criteria. The quantum of such performance bonus for each financial
year is determined by the Board on the recommendation of the Compensation Committee.
 Remuneration to Non-Executive Directors is by way of commission for each financial
year; such commission is determined by the Board within the limits approved by the
shareholders. Non-Executive Directors are also entitled to sitting fees for attending meetings of
the Board and Committees thereof, the limits for which have been approved by the shareholders.
The Corporate Management Committee determines the remuneration of other managers of the
Company.

 . Avoidance of conflicts of interest

In terms of the ITC Code of Conduct, as adopted by the Board, Directors, senior management
and employees must avoid situations in which their personal interest could conflict with the
interest of the Company.
Contracts in which Directors are interested, if any, are required to be placed before the
Board for approval. Further, senior management is also required to confirm on an annual basis
that no material transaction has been entered into by them which could have potential conflict
with the interest of the Company; such confirmations are placed before the Board.
The Company has a Code of Conduct for Prevention of Insider Trading („ITC Code‟) in
the shares and securities of the Company. The ITC Code, inter alia, prohibits purchase/sale of
shares of the Company by employees while in possession of unpublished price sensitive
information in relation to the Company. Instances of violation of the ITC Code, if any, are
reported to the Board and to the regulatory authorities.
 Shareholders

ITC believe that it acts as trustees of shareholders‟ wealth, it is their responsibility to protect and
enhance their wealth and continue to enjoy their trust. Their primary concerns remain continued
profitability and growth, communication and investor servicing.
As one of India‟s foremost private sector companies, ITC has performed consistently
well and since inception of the Company, have rewarded our shareholders with uninterrupted
dividend and issue of bonus shares from time to time.
The Chairman addresses and provides clarifications to shareholders at least once a year,
at the Annual General Meeting, the principal forum for face-to-face interaction, in the presence
of the entire Board. The Board encourages open dialogue with all the shareholders–individuals,
corporate or foreign investors.
The website of the company www.itcportal.com provides comprehensive information and
an exclusive section on „Shareholder Value‟ serves to inform and service shareholders; an
exclusive e-mail ID has also been provided to the shareholders for direct interaction.
The investor centre of ITC Investor Service Centre (ISC), accredited with ISO 9001:2000
certification for its investor servicing, provides high quality service to our „providers of capital‟
through its dedicated and trained team of professionals supported by state-of-the-art
infrastructure and systems.

Employees

ITC continued to advance its strategic agenda of making each of its businesses globally
competitive and create new engines of growth by blending proven skills and capabilities drawn
from different parts of the ITC Group. During the year, the focus was on further strengthening
the organisational vitality and competitiveness -

 Marshalling the energy of the team of over 26,000 employees towards achieving break-
through performance.
 Developing the agility and creativity to speedily embrace change.
 Developing leaders who are architects of collectives of talented, passionate and diverse
individuals.
 Creating a shared mindset across the organisation where employees are inspired, engaged
and aligned to the Company‟s purpose, mission, vision, values and objectives.
External Corporate Governance

Customers

Understanding customers and addressing their needs and aspirations continued to be prime focus
for all business strategies and plans of the ITC.
Both traditional tools and innovative approaches such as market surveys, ongoing
personal contacts/visits, effective capture & prompt response to any complaints, key account
managers, joint development/improvement projects, etc., were deployed to understand their
needs and preferences.
ITC continued to delight its customers through newer products, value added services and
improvement in product quality. The R&D experts and world-class laboratories supported newer
products/variants and benchmarked quality.
ITC continued to make significant investments in infrastructure and IT to further improve
the supply chain management thereby improving availability of our products.

Farmers

Farmers have been an integral part of ITC‟s value chain for nearly a hundred years . Since most
significant and principle raw materials in ITC are agri based, it partners the farmers in securing
improved productivity, assured markets and better price realization.
The Agri Business (including the Leaf Tobacco division) and Paperboards & Specialty
Papers business have used R&D and innovation capabilities to improve the farmers‟ lives and
livelihood through newer varieties and improvements in farm productivity.
Some of the important initiatives that have built capabilities and brought significant
prosperity to a very large number of farmers are -
 Empowerment of farmers through our internationally acclaimed e-Choupals.
 Farm and social forestry initiatives covering over 80,000 hectares with superior, disease
resisting clones.
 Watershed development.
 Livestock Development.
 Training and awareness building for adoption of integrated pest management, water &
energy conservation measures and post harvest management.
 Government

ITC comply with all the economic, environmental & social regulations, pay all relevant taxes and
monitor and report all the relevant parameters/information to the regulatory bodies. We have also
achieved „beyond compliance‟ status by adopting international best practices.
ITC has issued guidelines to all employees and directors that they must respect and obey
all laws that apply to the Company‟s business, including state and local laws in the areas in
which the Company operates. Any questions as to the applicability of any law should be directed
to the Company‟s General Counsel. If a law conflicts with a policy in this Code, employees and
directors must comply with the law. If a local custom or policy conflicts with a policy in this
Code, employees and directors must comply with the Code. The managers proactively participate
in Government, statutory and business forums on issues relating to regulatory and public policy
framework.

Community
ITC actively engage with the communities around our operations. Its unique social development
initiatives are closely aligned to the needs and concerns of these communities. ITC‟s social
initiatives support the Millennium Development Goals (MDGs) enunciated by the United
Nations. The goals, which target reduction of poverty by half, promote gender equality and
provide universal education form a blueprint agreed to by all the nations of the world and leading
development institutions. ITC's initiatives which support the MDG - Poverty Eradication and
Hunger are listed below:

 E-Choupal
 Social and Farm Forestry Programme
 Integrated Watershed Development
 Integrated Agriculture Development Programme
 Livestock Development Programme
 Suppliers

ITC believe that suppliers are its „partners in progress‟ and are critical to ITC‟s value chain. All
the businesses have periodic reviews and vendor audits resulting in ongoing development. The
managers are stationed in a number of important outsourced manufacturing sites, to support
quality management systems, provide expertise and support in manufacturing technology which
in turn results in improved vendor capabilities and competitiveness.

Competition

The Company‟s activities are subject to antitrust and trade regulation statutes designed to
promote fair and honest competition. These laws govern the ways in which employees and
directors interact with both competitors and associates and prohibit activities such as fixing
prices, setting discriminatory prices and entering into agreements with competitors. All
employees and directors must comply with these laws.
In addition to complying with all antitrust laws and regulations, employees and directors
are expected to compete ethically and legally at all times. Stealing or misappropriating
proprietary information from competitors or others is prohibited.
GMI Rating

GMI‟s premise is simple: “companies that focus on corporate governance and

transparency will, over time, generate superior returns and economic performance and
lower their cost of capital”.

GMI rating includes a combination of quantitative factors and qualitative assessments.

GMI thus provides subscribers with a narrative explanation of its rating in addition to the
quantitative scores.

GMI develops a scoring model that examines each metric, weights it “according to
investor interest” and then calculates a rating on a scale of 1.0 (lowest) to 10.0 (highest).
The GMI scoring algorithm rewards (or penalizes) “outliers” and rank each firm relative
to the other companies in the GMI sample.

These ratings identify corporate governance characteristics that lead to desirable or

undesirable outcomes, users of these ratings may be able to earn superior risk adjusted
returns by either investing in firms with good governance.

Unlike other ratings, which receive its fees from the company being rated, GMI receives
fees from subscribers to its services.
Parameters for GMI Ratings and their Weightages

Parameters Weights

Board Accountability 20

Financial Disclosure and Internal Controls 20

Shareholder Rights 15

Remuneration 10

Market for Control 10

Corporate Behavior 15

Stakeholder Engagement 10
 Board Accountability
Combined Chair/CEO
Has a designated "lead" or senior non-
executive director
Non-executive Chair
Non-executive chair is independent
Directors subject to annual election by
all shareholders
Uses, or has adopted, some form of
majority voting in the election of
directors
Discloses corporate governance policies
YES
or guidelines
All directors attended at least 75% of
the board meetings and committee YES
meetings in the last fiscal year
The company discloses an over-
boarding policy limiting the number of
YES
directorships held by non-executive
directors
The company discloses an over-
boarding policy limiting the number of YES
directorships held by executive directors
RATING
Non-executive directors have a formal session without
YES NO
the executive members at least once a year
Board policy is for the non-executive directors to meet
YES in executive session before or after every board NO
meeting, time permitting
At least one director serves on the boards of four or
NO NO
more public companies
Executive Chairman, Chief Executive Officer or
NO Managing Director (as applicable) serves on the boards NO
of three or more public companies
Related-party transactions involving officers or
YES NO
directors in the past three years
Related-party transactions involving the Chairman,
CEO, President, COO or CFO or a relative thereof, or
YES NO
the controlling shareholder, if any, within the last three
years
Discloses a code of ethics for senior executives or the
YES
employee code of ethics also covers senior executives
All non-executive directors own shares after excluding
NO
options held
All executive directors own shares after excluding
YES
options held
Within the last three years, company has failed to adopt
the specific recommendations (or a comparable
NO
alternative) of a shareholder proposal approved by a
majority vote
8.0
 Financial Disclosure & Controls

Audit committee wholly composed of

No Chair of the audit committee is non-executive Yes
independent members
At least one member of the audit committee
Currently under formal investigation for
serves on the boards of four or more public Yes No
accounting irregularities
companies
Someone other than senior management (such
At least one non-executive member of the
as the audit committee, shareholders or the
audit committee has expertise in accounting Yes No
board) has sole authority to hire and fire the
or financial management
company‟s outside auditor
Chair of the audit committee is non-executive Audit committee has sole authority to approve
and has expertise in accounting or financial Yes any non-audit services from the company's Yes
management outside auditor
Makes comprehensive disclosures on its
At least one non-executive member of the
enterprise risk management policies (ERM) in
audit committee has substantial industry No Yes
its annual report or in other publicly available
knowledge
sources
Non-executive members of the audit The board has adopted a separate committee or
committee with substantial industry No subcommittee responsible for oversight of risk Yes
knowledge form a majority of the committee management

RATING 8.33
 Shareholder’s Rights

Shareholders information on voting

Shareholders meetings procedures Yes No
procedure

Any deposit agreement for overseas

Notice of meeting Yes Yes
listing

Shareowners grievance redressal

Documents sent to shareholders Yes Yes
mechanism

Share structure- classes and rights of

Dividend History Yes Yes
common and preferred shares

RATING 8.75
 Remuneration
Remuneration committee wholly
composed of independent members
Discloses specific numeric performance
targets for the upcoming fiscal year.
Discloses a policy requiring company
executives to retain some or all of the
shares acquired through stock options
for a period of time after the options
have been exercised
The retention period for some or all
shares issued upon exercise of stock
options is 3 years or longer.
Some or all shares issued upon exercise
of stock options are required to be held No
until retirement
Discloses stock ownership guidelines
for non-executive directors
RATING
Shareholders have the ability to affect
remuneration policy through
No Yes
shareholder approval of the
remuneration committee Report.
The remuneration committee has
discretion to alter the criteria for
Yes management after being established or Yes
has power to grant incentives on a
discretionary basis.
Some or all restricted shares that have
Yes met all performance conditions are No
required to be held until retirement
Discloses stock ownership guidelines
Yes Yes
for the CEO
Discloses stock ownership guidelines
Yes
for the rest of senior management
Yes
9.09
 Market for Control

Single shareholder controls or shareholder

Has adopted a shareholder rights plan
group acting together control over 50% of No Yes
("poison pill")
the company's voting power
Involved in a series of cross-shareholdings
Shareholder rights plan ("poison pill")
with other (related or unrelated) No No
has been ratified by a shareholder vote
companies
The company has a unilateral right to
amend the by-laws/articles of
Has a staggered ("classified") board Yes Yes
association without shareholder
approval
Shareholder rights plan includes a
provision allowing it to be redeemed
Directors can be removed without cause Yes by a vote of the majority of No
shareholders other than the potential
acquirer ("chewable" pill)
Fair price provision is in place or the Shareholder rights plan includes a
company is subject to fair price protection Yes TIDE provision or a three-year sunset No
under applicable law provision

RATING 8.33
 Corporate Behavior

Company (or a current or former senior

Alleged by a responsible party that the
executive) has been subject to a formal
company used child labor (under 14 or
regulatory investigation for a material Yes No
the minimum in market, whichever is
issue other than for accounting
higher) within the last three years
irregularities within the last year
Company (or a current or former senior
executive) has been cited, settled, or Alleged by a responsible party that the
been found guilty of by either national or company used child labor as a source
No No
supranational authorities for some breach for sub-contracted work within the last
of law involving non-accounting issues three years
within the last year
Has been charged with three or more
Discloses its environmental policies Yes serious workplace safety violations No
within the last two years
Has a policy addressing workplace
Discloses its environmental performance Yes Yes
safety
Discloses its workplace safety record
Discloses its policy regarding corporate
Yes in the annual report or in another form Yes
level political donations
accessible to shareholders

RATING 9
 Stakeholder Engagement
Identify, prioritize and address the needs and concerns of all our stakeholders, across all
businesses and units as well as at the corporate level.

• Shareholders
• Customers
• Employees
• Farmers
• Suppliers
• Government
• Community

RATING 7

Overall Ratings

Parameters Weights Ratings

Board Accountability 20 8

Financial Disclosure and Internal Controls 20 8.33

Shareholder Rights 15 8.75

Remuneration 10 9.09

Market for Control 10 8

Corporate Behavior 15 9

Stakeholder Engagement 10 7

Final Rating 8.34

Conclusion

The Corporate Governance Rating of ITC was calculated by GMI method, & comes out to be
8.43 on a scale of 10. While calculating it a new parameter Stakeholders Engagement was also
taken into consideration apart from the regular six parameters. This figure depicts the highly
acclaimed practices followed in the organization. It is very well above the industrial average of
Corporate Governance rating.

Reference
 www.gmiratings.com
 www.itcindia.com
 www.wikipedia.com
 Business Ethics & Corporate Governance by A.C.Fernando.