Corporate Governance:

Contemporary Challenges

Dr. V K Sapovadia
 Flow of presentation

Corporate Governance explained

Corporate Governance issues and fraud after

90s

Recent Corporate Governance issues

Some solutions

Dr. V. K. Sapovadia 04/20/17

 Corporate Governance

The term used to refer to the policies and

processes by which a company is
controlled and directed

It refers especially to the way power and

accountability flow between shareholders,
boards of directors, CEOs, and senior
managers

04/20/17
Dr. V. K. Sapovadia
 Raison detre

..being managers rather of other

peoples money than of their own, it
cannot be well expected, that they
should watch over [the firm] with the
same anxious vigilance [as owners]

- Adam Smith (1776) on agency problems

Dr. V. K. Sapovadia 04/20/17

Corporate Governance

An
Approa
ch

Dr. V. K. Sapovadia 04/20/17

 Corporate Governance Explained

Corporate governance is
a relationship among stakeholders that is
used to determine and control the strategic
direction and performance of organizations

concerned with identifying ways to ensure

that strategic decisions are made effectively

used in corporations to establish order

between the firms owners and its top-level 6

managers

Dr. V. K. Sapovadia 04/20/17

 SEBI: Corporate Governance
defined
Corporate governance is the acceptance by
management of the inalienable rights of
shareholders as the true owners of the
corporation and of their own role as trustees on
behalf of the shareholders. It is about
commitment to values, about ethical business
conduct and about making a distinction
between personal and corporate funds in the
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management of a company.

Dr. V. K. Sapovadia 04/20/17

 The impact

Micro level Macro level

Good Corporate McKinsey & Company's
Governance has Global Investor Opinion
increasingly recognized Survey concludes that
for improving firms corporate governance
competitiveness, better and financial disclosure
relationship with all are key factors in
stakeholders, better investment decisions
performance by
enhancing wealth of
stakeholders (Melsa
Ararat et al)
 Goals.

To control the managerial tendency to

pursue personal interests and objectives
that conflict with those of maximizing
efficiency and value of the firm

To fill in the gaps in the incomplete

corporate contracts

Dr. V. K. Sapovadia 04/20/17

Conflict of interest and Corporate
Governance

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Dr. V. K. Sapovadia 04/20/17

 Agency Relationship - Owners and
Managers

Shareholders
(Principals) Risk bearing specialist
Firm owners

Agency relationship Pays

Managers
(Agents) Managerial decision-making specialist
Decision makers

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 Real Life issues in managing a firm

Asset transfers and stripping through

manipulation

Dilution via new equity issues

Diversion of corporate opportunities

Hiring under-qualified family members

Overpaying executives

Perquisites consumption 12

Dr. V. K. Sapovadia 04/20/17

 Global failures
Enron
Off balance sheet items by innovative financial
structures
WorldCom
Overstated EBIDTA by recording revenue
expenses as capital expenditures
Adelphia Communications
Failed to properly disclose guaranteed loans to
promoter
Merck
Recorded revenue from the subsidiary never
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actually collected
Satyam Computer Services
Falsified accounts to divert funds and hide loss and
liabilities Dr. V. K. Sapovadia 04/20/17
 What it Means?

Corporate misconduct

Fraud committed by internal entities to

willfully erode shareholder value

Malpractices in accounting, reporting,

operations and management conduct
unjust enrichment

Product of corporate greed and culture 14

Dr. V. K. Sapovadia 04/20/17

 Recent issues
The Ratan Tata vs. Cyrus Mistry boardroom
battle has cast the spotlight on the quality of
corporate governance in board-managed
companies and highlighted the need for a
wider, robust debate around the role of
independent directors, higher levels of
transparency and fairness

Narayan Murthy vs. Vishal Sikka verbal spat on

high pay to Sikka & severance pay to ex-CFO
Rajiv Bansal and appointment of independent
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director

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Dr. V. K. Sapovadia
 Structural and cultural
problems

Conglomerates lead to promoters within

promoters, there are cross-holdings
Companies would have subsidiaries, which
themselves would be listed, creating huge
cascading hierarchy
Roles and responsibility not properly delineated
Owner mindset
Multiplicity of vague and teeth-less legal
provisions
Lack of statutory monitoring
Poor corporate governance pays in India 16

Independence of Independence Director

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Dr. V. K. Sapovadia
 The issues

Succession planning
Old vs. New guard ideology, approach
Compliance vs. Trusteeship
Personality clash
Capital allocation is at the heart of recent
governance debates
Lack of transparency and disclosure
Inadequate linkage between the corporate
world and the academic world
Short vs. Long Term Performance 17

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Dr. V. K. Sapovadia
 Good Governance

Transferring resources across time and space

by consultation
Properly managing risk short/long term
performance
Generating and providing timely, faithfully,
correct information
Dealing with incentive problems
Resolving competing claims on the wealth
generated by company
Succession planning 18

Dr. V. K. Sapovadia 04/20/17

 Good Governance

Emphasize completeness, understandability,

relevance, reliability, comparability of
information required by diverse stakeholders
Striking balance without compromising
competitive advantage
Continuous dialogue between old and new guard
Shared leadership
Promoting healthy debate
Shareholders activism
Role of media and corporate investigative 19
journalism

Dr. V. K. Sapovadia 04/20/17

Questions and Answers
THANK YOU!

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04/20/17
Dr. V. K. Sapovadia