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Flow of presentation

Definition Commonly Accepted Principles Mechanisms of Corporate Governance in India Corporate Governance Scandals Resolving the flaws of Corporate Governance Conclusion

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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 amongst the stakeholders involved and the goals for which the corporation is governed. Principal stakeholders being the

shareholders, the board of directors, executives, employees, customers,

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Commonly Accepted Principles

Rights and equitable treatment of shareholders Interests of other stakeholders Role and responsibilities of the board Integrity and ethical behavior Disclosure and transparency

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Mechanisms of Corporate Governance in India

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Companies Act

One of the biggest legislations with 658 sections and 14 schedules The Act confers legal rights to shareholders to

Vote on every resolution placed before an annual general meeting; To elect directors who are responsible for specifying objectives and laying down policies; Determine remuneration of directors and the CEO; Removal of directors and Take active part in the annual general meetings.

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Securities law

The primary securities law : SEBI Act A number of initiatives towards investor protection One such initiative is to mandate information disclosure both in prospectus and in annual accounts.

Nominees on company boards

Development banks hold large blocks of shares in companies. Being equity holders, these investors have their nominees in the boards of companies. These nominees can effectively block resolutions, which may be detrimental to their interests.

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Statutory audit

Auditors are the conscious-keepers of shareholders, lenders and others who have financial stakes in companies. The auditing process ensures that financial statements are accurate and complete, thereby enhancing their reliability and usefulness for making investment decisions.

Discipline of the capital market

Capital market itself has considerable impact Role the minority shareholders can play effectively . They can

refuse to subscribe to the capital of a company in the primary market and in the secondary market

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Code of conduct

The mechanisms discussed till now are regulatory in approach. They are mandated by law and violation of any provision invites penal action. Legal rules alone cannot ensure good corporate governance. What is needed is self-regulation on the part of directors, besides of course, the mandatory provisions

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CORPORATE GOVERNANCE SCANDALS

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CORPORATE GOVERNANCE FAILURES

Corporate governance, in todays world, is more in theoretical concepts rather than practical implications. Critical factors in many corporate failures are:

Poorly designed rewards package Including excessive use of share options (that distorted executive behavior towards the short term) The use of stock options, or rewards linked to short-term share price performance (led to Aggressive earnings management to achieve target share prices) Trading did not deliver the earnings targets, aggressive or even fraudulent accounting tended to occur. This was very apparent in the cases of Ahold, Enron, WorldCom and Xerox .

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SCANDALS AT A GLANCE
THE COBBLERS SCAM SOHIN DAYA CASE

Sohin Daya(son of a former Sheriff of Mumbai) of Dawood Shoes, Rafique Tejani of Metro Shoes, and Kishore Signapurkar of Milano Shoes were arrested for creating several leather co-operative societies which did not exist. They availed loans of crores of rupees on behalf of these fictitious societies The scam was exposed in 1995. Officials of the Maharashtra State Finance Corporation, Citibank, Bank of Oman, Dena Development Credit Bank, Saraswat Co-operative Bank, and Bank of Bahrain and Kuwait were also charge sheeted.

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SATYAM ACCOUNTING SCANDAL

7 January 2009 : Scandal publicly announced ; when Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified. He was charged with several offences, including criminal conspiracy, breach of trust, and forgery. 10 January 2009: The Company Law Board decided to bar the current board of Satyam from functioning and appoint 10 nominal directors. Vadlamani Srinivas, then-CFO, was arrested and kept in judicial custody by CID 11 January 2009 : Government nominated noted banker Deepak Parekh, former NASSCOM chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

14 January 2009 : Price Waterhouse announced the audit reports as "inaccurate and unreliable 3/12/12

22 January 2009: Declared in court that the actual number of employees is only 40,000 and not 53,000 as reported earlier . Mr. Raju had been allegedly withdrawing INR 20 crore rupees every month for paying these 13,000 non-existent employees. Many renowned firms like BOA, Credit Suisse terminated its engagement with Satyam. Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues, awarded in 2008, was stripped from Satyam This has been analyzed as a problem relating to India's caste-based, family-owned corporate environment.

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UNILEVER AND MERCURY POISONING IN KODAIKANAL, Tamil nadu

In 1984 , Ponds set up a thermometer factory in Kodaikanal, which was acquired by HUL in 1997 In 2001 Greenpeace and Palani Hills Conservation Council (PHCC) uncovered and brought into the public domain the severity of HULs acts of toxic dumping. Mercury is a neurotoxin and it can damage the brain, heart, kidney, and liver. The factory in Kodaikanal exposed its workers to the hazardous mercury and released tons of mercury waste into its surroundings. Workers of the thermometer factory were not warned of the hazardous nature of mercury, nor were they given any protective gear. At least 19 workers from the factory died.

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Faced with the inability to work and massive medical expenses, several workers and their families were confronting destitution. The company refused to come to the aid of those poisoned by it, and delayed clean up to international standards. On 25 February 2008, the Office Bearers of All India Council of Unilever Unions, on being informed about the present pathetic condition of the exworkers and their families of Kodaikanal factory decided to support the struggle of Kodaikanal workers & their families and passed a Resolution to work jointly with the Ex-Workers of Kodaikanal for getting them Justice and compensation to the mercury affected workers & their families from the Hindustan Unilever Management.

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STONE QUARRYING COMPANIES AND SILICOSIS IN LAL KUAN

Lal Kuan area in New Delhi had nearly 300 stone quarrying companies, employing thousands of migrant workers from rural areas of Rajasthan, UP , Bihar, and MP. Most workers belonged to SC, ST and OBC categories. It was discovered that workers suffer from a high incidence of respiratory illnesses such as silicosis, tuberculosis and silico-tuberculosis. Many had died premature deaths and hundreds were confronting severe health problems, inability to work and high medical expenses. This was due to high exposure to silica The workers were not informed about the hazards of silica exposure, nor were they given any protective gear or health care facilities to monitor their health. Health care professionals misdiagnosed the illness for years both out of ignorance and also because an acknowledgement of the disease would entail fixing responsibility of safety standards on the stone quarrying companies and the Delhi Governments Labour Department In 1992 ,by a Supreme Court order in response to a public interest litigation filed by a lawyer M. C. Mehta, these companies were shut down.

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INTERNATIONAL SCANDALS AT A GLANCE

2008 Siemens scandal

It was a corruption and bribery scandal that hit Greece over deals between Siemens AG and Greek government officials during the 2004 Summer Olympic Games in Athens ,regarding security systems and purchases by OTE in the 1990s. Charges have not been bought against any specific individual, as under Greek law charges can be filled against "any responsible person".So far, no wrongdoing has been proved, The scandal has created a serious change in the attitudes of the Greek public, most notably dissatisfaction with both main political parties in Greece, Nea Dimokratia and PASOK, and the alleged scandal may have been responsible for a shift of the electorate towards "third parties" such as SYRIZA and LAOS.

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Bribes may have been up to 100 million Euro and were allegedly given in order to win state contracts. Contrary to the scandal, Siemens continues to enjoy the confidence of the Greek consumers to its products and there are no data that indicate any shift in the consuming preferences A Greek prosecutor, after 2 years of investigations, filled charges in 2008 for money laundering and bribery. Tasos Mantelis, Minister for Transport and Communications in 1998 admitted in 2010, that the sum of 200,000 German marks was deposited in 1998 in a Swiss bank account from Siemens during his administration, allegedly for funding his election campaign. A further deposit of 250,000 German marks was made into the same bank account in 2000 which he claims is from an unknown source.

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ENRON ACCOUNTING SCANDAL

Revealed in October 2001, this scandal eventually led to the bankruptcy of the Enron Corporation and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was attributed as the biggest audit failure. Formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Jeffrey Skilling was hired, he 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. Andrew Fastow ,CFO 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.

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Shareholders lost nearly $11 billion and 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. On December 2, 2001, Enron filed for bankruptcy. Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the following year. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court, but by the time the ruling was overturned at the U.S. Supreme Court, the firm had lost the majority of its customers and had shut down. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies. One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.

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FOCUS ON ISSUES TO RESOLVE THE FLAWS OF CORPORATE GOVERNANCE

Segregation of duties - Chairman and CEO Audit Committee Independence and conflicts of interest Flow of information Too many directorships

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Conclusion

In our complex corporate environment, failure to share information is the basic problem. The concept of corporate governance implies consistent and effective laws, methods, and metrics for governing our nations public companies. The difficulty remains in the implementation of the principles of corporate governance ,thus posing it just as a toy in the hands of corporate honchos

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Any Questions?

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