Corporate governance is the set of processes,customs, policies, laws, and institutions affecting theway a corporation is directed, administered orcontrolled. The principal stakeholders are the shareholders,management, and the board of directors. Other stakeholders includelabor(employees), customers, creditors(e.g., banks, bond holders), suppliers,regulators, and the community at large.
“Corporate governance is about owners and themanagers operating as the trustees on behalf ofevery shareholder–large or small.”- Narayana N. R. MurthyChief MentorInfosys Technologies Limited
The ownership structure› Determines, to a considerable extent, how aCorporation is managed and controlled. The structure of company boards› The board of directors is responsible forestablishing corporate objectives, developingbroad policies and selecting top-level executivesto carry out those objectives and policies.
The financial structure› Proportion between debt and equity, hasimplications for the quality of governance. The institutional environment› Corporate governance mechanisms are economicand legal institutions and often the outcome ofpolitical decisions.
Independent directors need significant empowerment Principle of trusteeship - appropriate protection forminority shareholders Committees of boards may not have higheffectiveness Quality of Management Discussion and Analysis inannual reports is moderate Audit committee skill-sets may need to be enhanced Corporate Social Responsibility - not yet top of mindfor Indian corporates
Demand for information Monitoring costs Supply of accounting information
Table : Recent financial irregularitiesCompany Country What went wrongAhold NL earnings overstatedEnron USAinflated earnings, hiddebt in SPEsParmalat Italyfalse transactionsrecordedTyco USAlooting by CEO,improper share deals,evidence of tamperingand falsifying businessrecordsWorldCom USAexpenses booked ascapital expenditureXerox USAaccelerated revenuerecognition
The Enron scandal, revealed in October 2001, eventually ledto the bankruptcy of the Enron Corporation, an Americanenergy company based in Houston, Texas, and the dissolutionof Arthur Andersen, which was one of the five largest auditand accountancy partnerships in the world. Enron wasattributed as the biggest audit failure. Enron was formed in 1985 by Kenneth Lay after mergingHouston Natural Gas and InterNorth. Jeffrey Skillingdeveloped a staff of executives that, through the use ofaccounting loopholes, special purpose entities, and poorfinancial reporting, were able to hide billions in debt fromfailed deals and projects.
CFO Andrew Fastow and other executives not only misledEnrons board of directors and audit committee on high-riskaccounting practices, but also pressured Andersen to ignorethe issues. Arthur Andersen was charged with and found guilty ofobstruction of justice for shredding the thousands ofdocuments and deleting e-mails and company files that tiedthe firm to its audit of Enron.
Shareholders lost nearly $11 billion when Enrons stock price,which hit a high of US$90 per share in mid-2000, plummetedto less than $1 by the end of November 2001. The U.S. Securities and Exchange Commission (SEC) beganan investigation, and rival Houston competitor Dynegyoffered to purchase the company at a fire sale price. The deal fell through, and on December 2, 2001, Enron filedfor bankruptcy under Chapter 11 of the United StatesBankruptcy Code. Enrons $63.4 billion in assets made it the largest corporatebankruptcy in U.S. history.
Enron had faced severalserious operational challenges,namely logistical difficulties in runninga new broadband communications tradingunit, and the losses from constructingthe Dabhol Power project, a large powerplant in India Credit rating downgrade
It was the largest bankruptcy in U.S. history and resulted in4,000 lost jobs. Nearly 62% of 15,000 employees savingsplans relied on Enron stock that was purchased at $83 in early2001 was worthless. Dynegy Inc. unilaterally disengaged from the proposedacquisition of the company and Enrons credit rating fell tojunk status.
Chairman and CEO : Good practice is to separate the roles of theChairman of the Board and that of the CEO. In Enron, Mr KennethLay was both the Chairman and CEO. Audit Committee : It not only oversees the work of the auditorsbut is also expected to independently inquire into the workings ofthe organisation and bring lapses to the attention of the full board.The Board assigned the Audit and Compliance Committee anexpanded duty to review the transactions, but the Committeecarried out the reviews only in a cursory way. Independence and conflicts of interest : Good governancerequires that outside directors maintain their independence and donot benefit from their board membership other than remuneration.Otherwise, it can create conflicts of interest.
Flow of information : A board needs to be provided withimportant information in a timely manner to enable it to perform itsroles. In the Enron situation, the directors are pleading ignorance ofthe murky deals as a way of excusing themselves of the liability. Too many directorships : Being a director of a company takestime and effort. Good governance, therefore, suggests that anindividual sitting on too many boards looks upon it only as asinecure for he or she will not have the time to do a good job. MrRaymond Troubh, one of the directors, is a Director of 11 publiccompanies. It shows that time, effort and ability of the director willbe divided to different other companies.
INTRODUCTION Satyam Computer Services Ltd. is a consulting andinformation technology services company based inHyderabad, India Indias fourth-largest IT services firm The company offers information technology (IT)services spanning various sectors, and is listed on theNew York Stock Exchange and Euro next It is considered as an icon among the IT companiesand at one point had over a billion dollar revenue The Satyam Computer Services scandal was publiclyannounced on 7 January 2009
SCAM…. Raju and his family held below 10% of thecompany’s equity Raju allegedly used accounts opened in thenames of relatives to divert money and carry outinsider trading Siphoning off funds from Satyam into MaytasInfra, Maytas Properties and various 325 firmsfloated by Mr. B Ramalinga Raju
Contd…. Its financial statements for years were totallyfalse and cooked up Never had Rs 5064 crore (US$ 1.05Billion)shown as cash for several years. Its liability was understated by $1.23Billions The Debtors were overstated by 400millions plus
SAD RESULTS Satyam employees face a bleak future Satyam employees were told that there is noassurance if they will receive salaries beyondJanuary The Sebi had in December given a clean chit toSatyam in the probe on violation of corporategovernance law
CONCLUSION Irrespective of 9% stake, a man could do a scam. A complete failure of Corporate Governance. To avoid this, a company needs to strictly followa proper system of corporate governance androtating the auditors for every couple of years
Ironically, Satyam means "truth" in Sanskrit, butRajus admission -- accompanied by hisresignation -- shows the company had beenfeeding investors, shareholders, clients andemployees a steady diet of asatyam (or untruth),at least regarding its financial performance.