Corporate governance outlines the processes, customs, policies, laws, and institutions affecting how a corporation is directed, administered and controlled. The key stakeholders are shareholders, management and the board of directors. In the case of Enron, lack of independence of the board and conflicts of interest led to poor oversight and hiding of crucial financial information from stakeholders. This resulted in the largest bankruptcy in U.S. history at that time and severe losses for employees and shareholders. The Satyam scandal similarly revealed false financial statements and siphoning of funds, destroying investor trust and employee jobs. Both cases highlight the importance of robust corporate governance mechanisms and transparency.

2.  Corporate governance is the set of processes,
customs, policies, laws, and institutions affecting the
way a corporation is directed, administered or
controlled.
 The principal stakeholders are the shareholders,
management, and the board of directors.
 Other stakeholders include
labor(employees), customers, creditors
(e.g., banks, bond holders), suppliers,
regulators, and the community at large.

3. “Corporate governance is about owners and the
managers operating as the trustees on behalf of
every shareholder–large or small.”
- Narayana N. R. Murthy
Chief Mentor
Infosys Technologies Limited

4.  The ownership structure
› Determines, to a considerable extent, how a
Corporation is managed and controlled.
 The structure of company boards
› The board of directors is responsible for
establishing corporate objectives, developing
broad policies and selecting top-level executives
to carry out those objectives and policies.

5.  The financial structure
› Proportion between debt and equity, has
implications for the quality of governance.
 The institutional environment
› Corporate governance mechanisms are economic
and legal institutions and often the outcome of
political decisions.

6.  Independent directors need significant empowerment
 Principle of trusteeship - appropriate protection for
minority shareholders
 Committees of boards may not have high
effectiveness
 Quality of Management Discussion and Analysis in
annual reports is moderate
 Audit committee skill-sets may need to be enhanced
 Corporate Social Responsibility - not yet top of mind
for Indian corporates

7.  Demand for information
 Monitoring costs
 Supply of accounting information

8. Table : Recent financial irregularities
Company Country What went wrong
Ahold NL earnings overstated
Enron USA
inflated earnings, hid
debt in SPEs
Parmalat Italy
false transactions
recorded
Tyco USA
looting by CEO,
improper share deals,
evidence of tampering
and falsifying business
records
WorldCom USA
expenses booked as
capital expenditure
Xerox USA
accelerated revenue
recognition

10.  The Enron scandal, revealed in October 2001, eventually led
to the bankruptcy of the Enron Corporation, an American
energy company based in Houston, Texas, and the dissolution
of Arthur Andersen, which was one of the five largest audit
and accountancy partnerships in the world. Enron was
attributed as the biggest audit failure.
 Enron was formed in 1985 by Kenneth Lay after merging
Houston Natural Gas and InterNorth. Jeffrey Skilling
developed a staff of executives that, through the use of
accounting loopholes, special purpose entities, and poor
financial reporting, were able to hide billions in debt from
failed deals and projects.

11.  CFO Andrew Fastow and other executives not only misled
Enron's board of directors and audit committee on high-risk
accounting practices, but also pressured Andersen to ignore
the issues.
 Arthur Andersen was charged with and found guilty of
obstruction of justice for shredding the thousands of
documents and deleting e-mails and company files that tied
the firm to its audit of Enron.

12.  Shareholders lost nearly $11 billion when Enron's stock price,
which hit a high of US$90 per share in mid-2000, plummeted
to less than $1 by the end of November 2001.
 The U.S. Securities and Exchange Commission (SEC) began
an investigation, and rival Houston competitor Dynegy
offered to purchase the company at a fire sale price.
 The deal fell through, and on December 2, 2001, Enron filed
for bankruptcy under Chapter 11 of the United States
Bankruptcy Code.
 Enron's $63.4 billion in assets made it the largest corporate
bankruptcy in U.S. history.

13.  Enron had faced several
serious operational challenges,
namely logistical difficulties in running
a new broadband communications trading
unit, and the losses from constructing
the Dabhol Power project, a large power
plant in India
 Credit rating downgrade

14.  It was the largest bankruptcy in U.S. history and resulted in
4,000 lost jobs. Nearly 62% of 15,000 employees' savings
plans relied on Enron stock that was purchased at $83 in early
2001 was worthless.
 Dynegy Inc. unilaterally disengaged from the proposed
acquisition of the company and Enron's credit rating fell to
junk status.

16.  Chairman and CEO : Good practice is to separate the roles of the
Chairman of the Board and that of the CEO. In Enron, Mr Kenneth
Lay was both the Chairman and CEO.
 Audit Committee : It not only oversees the work of the auditors
but is also expected to independently inquire into the workings of
the organisation and bring lapses to the attention of the full board.
The Board assigned the Audit and Compliance Committee an
expanded duty to review the transactions, but the Committee
carried out the reviews only in a cursory way.
 Independence and conflicts of interest : Good governance
requires that outside directors maintain their independence and do
not benefit from their board membership other than remuneration.
Otherwise, it can create conflicts of interest.

17.  Flow of information : A board needs to be provided with
important information in a timely manner to enable it to perform its
roles. In the Enron situation, the directors are pleading ignorance of
the murky deals as a way of excusing themselves of the liability.
 Too many directorships : Being a director of a company takes
time and effort. Good governance, therefore, suggests that an
individual sitting on too many boards looks upon it only as a
sinecure for he or she will not have the time to do a good job. Mr
Raymond Troubh, one of the directors, is a Director of 11 public
companies. It shows that time, effort and ability of the director will
be divided to different other companies.

18. SATYAM SCAM

19. INTRODUCTION
 Satyam Computer Services Ltd. is a consulting and
information technology services company based in
Hyderabad, India
 India's fourth-largest IT services firm
 The company offers information technology (IT)
services spanning various sectors, and is listed on the
New York Stock Exchange and Euro next
 It is considered as an icon among the IT companies
and at one point had over a billion dollar revenue
 The Satyam Computer Services scandal was publicly
announced on 7 January 2009

20. SCAM….
 Raju and his family held below 10% of the
company’s equity
 Raju allegedly used accounts opened in the
names of relatives to divert money and carry out
insider trading
 Siphoning off funds from Satyam into Maytas
Infra, Maytas Properties and various 325 firms
floated by Mr. B Ramalinga Raju

21. Contd….
 Its financial statements for years were totally
false 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

22. SAD RESULTS
 Satyam employees face a bleak future
 Satyam employees were told that there is no
assurance if they will receive salaries beyond
January
 The Sebi had in December given a clean chit to
Satyam in the probe on violation of corporate
governance law

23. 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 follow
a proper system of corporate governance and
rotating the auditors for every couple of years

24.  Ironically, Satyam means "truth" in Sanskrit, but
Raju's admission -- accompanied by his
resignation -- shows the company had been
feeding investors, shareholders, clients and
employees a steady diet of asatyam (or untruth),
at least regarding its financial performance.