Corporate Govenrance MBA

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Corporate Governance


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Problems in Corporate Governance:Vanishing Companies: Between 1991 and 1996,

out of 3900 companies which offered IPO, 2500 have vanished

There are over 1.36 lakhs companies which are defaulting in complying with requirements of Company Law

There are about 2481 sick companiesThere is significant no of companies which have

not paid any dividends since 1996

Corporate GovernanceLatest Developments:SatyamLibor fixation by Senior executives of international banks.Common Wealth Games ScamTelecom Licenses : 2G scamCoal mining allocations scam Coalgate scamRajat Gupta – Insider Trading scam

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Corporate GovernanceConsider this:Moral failure pervaded our public life :One out of every five members of Indian parliament elected

in 2004 had criminal charges against himA Harvard Professor found that one out of every four

teachers in Govt primary schools is absent and one out of every four is simply not teaching.

A world bank study found that two out of five doctors do not show up at primary health centres and that 9% of their medicines are stolen.

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Corporate GovernanceA cycles rickshaw driver in Kanpur routinely pays a fifth of

his daily earnings in bribes to the police.A farmer can not hope to get a clear title to his land without

bribing a revenue official and that too after a humiliating ordeal of countless visits to the revenue office.

- Gurcharan Das : Difficulty of Being Good.

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With uplifted arms I cry, but no one heeds;

From Dharma flow wealth and pleasure,Then why is dharma not pursued ? - Mahabharat : XVIII .5.49

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Corporate GovernanceReasons for Poor Corporate Governance in India:Feudal mid set that exists in IndiaManifold restrictions set by GovernmentLack of concern for societySense of insecurity that prevails amongst the very

people who are supposed to inspire a sense of confidence about the company among the stake holder population

Greed and Ego

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What is Corporate Governance?

Corporate Governance is the social, legal and economic proceess in which companies

function and are held accountable. It is the system by which companies are run

-Cadbury Committee Report.


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Corporate Governance is the exercise of power in responsible way

Sir Adrian Cadbury.Two identifiable strands of thinking:Some experts feel that Corporate Governance is

the system, procedures, and institutions that ensure that the management acts in the best interests of the owners i.e., Shareholders.


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Second school of thought believes that the management has to act in the best interest of all its stake holders which may include customers, employees, suppliers, creditors and the society of which the organization is a part.

Few more definitions:James D. Wolfensohn : Former president,

World Bank : Corporate Governance is about promoting corporate fairness, transparency and accountability.


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Standard & Poor:Corporate Governance is the way a

company is organized and managed to ensure that all financial stakeholders (Shareholders and Creditors) receive their fair share of company’s earnings and assets.


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CII : Corporate Governance deals with laws, procedures, practices and implicit rules that determine a company’s ability to take informed managerial decisions vis-à-vis its claimants, in particular, its shareholders, customers, the employees and the state. There is a Global consensus about the objective of good governance: Maximizing Long Term Shareholder Value


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Kumar Mangalam Birla Committee:Strong Corporate Governance is indispensable to

resilient and vibrant capital markets and is important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.


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Theories associated with development of corporate Governance :

Agency Theory Transaction Cost Economics Stakeholder TheoryStewardship Theory


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Agency Theory :Agency theory identifies the agency relationship where one party, the principal , delegates work

to another party , the agent.Problems in agency relationship are :Agent not acting in the best interest of the

principal, misusing powers for pecuniary or other advantages and not taking appropriate risks.


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In the context of corporations, and issues of corporate control, agency theory views directors as agents.

Cost resulting from misuse of their position as well as cost of monitoring and disciplining them so as to prevent abuse are called agency costs.

Much of the agency theory as related to corporations is in the context of separation of ownership and control.


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Transaction Cost Economics ( TCE ) Theory views firm as a corporate governance structure.

The resources of the economy are used by an entrepreneurs by forming an organisation called firm so as to carry out transactions at less cost . And as the firm grows in size , its costs comes down.

In its turn, firm becomes larger and more transactions it undertakes, and will expand up to the point where it becomes cheaper or more efficient for the transactions to be undertaken externally. TCE assumes that costs can be reduced by appropriate corporate governance structure.


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Stake Holder Theory :The stakeholder theory takes account of wider

group of constituents , rather than focusing on shareholders. The stakeholders would include the employees , the suppliers, the consumers, the lenders and creditors , the society and the Government, all of them have stake in the business and therefore their interests must be taken care of for sustainability of business.


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Stewardship theory :The stewardship theory regards directors as

stewards of the company’s assets and they will act in the best interests of the company. This theory permits the powers of CEO and Chairmanship of Board may be combined .

Corporate GovernanceDevelopment of Corporate Governance :Important Inter national Committees :Cadbury committee (1992)Greenbury committee (1995)Hampel Committee (1998)LSE Combined Code (1998)OECD Principles of Corporate Governance (1999)Blue Ribbon Committee (1999)Surbanes Oxley Act 2002.

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Corporate Governance Corporate Governance Reforms in India :Important Committees in India:CII : Voluntary Code of Corporate Governance (1998)Kumar Mangalam Birla Committee (2000)RBI Report of the Advisory Group on Corporate

Governance (2001)Naresh Chandra Committee ( 2002)Narayan Murthy Committee (2003)JJ Irani Committee (2005)

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Characteristics Principles:TransparencyIndependenceAccountabilityResponsibilityFairnessSocial Responsibility


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Objectives:That a properly structured Board capable of

taking independent and objective decisions in place

That the Board is balanced as regards the representation of adequate number of non executive and independent directors who will take care of the business and well being of all the stakeholders.


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Objectives:That Board adopts transparent procedures and

practices and arrives at decisions on the strength of adequate information.

That the Board has effective machinery to subserve the concerns of stake holders.

That the Board keeps the stakeholders informed of relevant developments impacting the company.


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Objectives:That the Board effectively and regularly monitors

the functioning of the management team.That the Board remains in effective control of the

company at all the times.The overall endeavor of the Board should be to

take the organization forward to maximize long term value and shareholders wealth.


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How is Corporate Governance Enforced?Companies Act, 1956.Through the listing Agreement with Stock

Exchange.Through independent well published ratings of

companies on Corporate Governance.Through institutional activism.Through self regulation


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Scheme of Management under Companies Act, 1956:

Separation of Ownership and Control:Shareholders provide equityShareholders appoint Board of DirectorsBoard of Directors appoint team of management for

day to day operationsShareholders also appoint independent professional

to report to them ie, Auditors.


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Companies Act, 1956 provides for:Detailed provisions for qualifications,

appointment, powers and removal of directors including restrictions on powers:

Powers to be exercised in the Board meetingPowers to be exercised with the consent of the

members of the company.


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• Manner in which P&L, balance Sheet, Directors report, Management Discussion & Analysis, Corporate Governance reports are to be prepared

• Manner in which AGM/EOGM are to be conducted.

• Report on compliance of provisions Companies Act in respect of companies having paid up capital of Rs.10 Lakhs to Rs.2 Crores


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• Provisions of Companies Act, 1956 contd.-• Appointment of Audit Committee of Board of

Directors by every company having paid up capital of not less than Rs.5 crores

• Directors Responsibility Statement : To be given in Directors Report that proper accounting policies have been adopted and accounting standards have been complied with.


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Representation of small ShareholdersFor companies with paid up capital of Rs. 5

Crore and above and having 1000 or more shareholders, there should be representation of small shareholders on board

Amendment of Sec. 274 : Disqualification of Directors:

Non filing of Balance Sheet and Annual return as well as Non payment of interest or deposits would render the Directors Disqualified to be appointed for a period of 5 years


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Disclosures in Audit report : Compliance of Accounting standards, payment of Interest, Deposits, Dividends

Strengthening of Board : Requirement of Independent DirectorsIf Chairman is Independent and Non executive :

One third of the members to be independentIf Chairman is Executive, half the members of

the Board to be Independent


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Report on Corporate Governance to be given to members together with Director’s Report

Certification from Auditors regarding Compliance on Corporate Governance

Quarterly reporting on Compliance.


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Requirements under Listing Agreement:Listed companies are required to report to Stock Exchanges

every quarter compliance of various items of clause 49 as under:

1 : Composition of Board of Directors : Independent Directors : There should be combination of Executive and Non executive Directors with not less than 50% of the Directors to be Non-executive and incase Chairman is Non executive Independent person, one third of Directors to be Non executive

The essence of these guidelines is that the business will be managed and its performance is monitored without bias and the benefits of Independent Directors will be available to the business

Corporate Governance : Listing Requirements

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2 : Audit Committees :The Board of Directors of Listed Companies is required

to form an Audit Committee of minimum 3 Directors, with 2/3 of them being Independent Directors. There are guidelines as to Financial Literacy of Audit Committee members, role of Audit Committees and Periodicity of meetings and Agendas for the meeting

The essence of these guidelines are to ensure that Control Function of the business is exercised by Independent Directors having Financial Literacy.


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Audit Committee shall have minimum 3 members all being Non executive and majority being Independent Directors

Chairman of Audit Committee to be Independent DirectorThe Auditors, Internal Auditor, Director-in-charge of

Finance shall attend and participate at the meetings of Audit Committee but shall not vote

The Audit Committee shall discuss with the auditors periodically about Internal Control Systems, the scope of Audit including the observations of the Auditors and review the quarterly and Annual Financial Statements before the Board and ensure compliance of internal Control System


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Audit Committee shall have the authority to investigate into any matter and shall have full excess to information contained in the records of the and take external professional advice if required.

Recommendations of the Audit Committee on any matter relating to financial management including audit report shall be binding on the Board.

The Audit Committee should meet at least four times in a year. One meeting shall be held before finalization of accounts and once in every six months.


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3. Subsidiary Companies :At least one Independent Director of holding company

should be director on the Board of Directors of non listed Indian Subsidiary company to review financial statements of Subsidiary Company.

The essence of the guideline is that the transactions of subsidiary company are seen by Independent Director to review and control its performance.


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4. Disclosures : The statement of related party transactions to be places before audit committee, disclosure of compliance to accounting standards in financial statements, disclosures as to utilization proceeds of public issues, right/debt or even preferential issues, pecuniary relationship or transactions of non executive directors, remuneration of directors, management discussion and analysis, record of attendance of directors at board meetings/ general meetings, segment wise quarterly reporting, etc.

The essence of these disclosures is to bring in transparency in business dealings of the companies vis-à-vis their stakeholders.


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5. Accountability : The CEO or CFO have to certify to the Board that they have reviews the financial statements and cash flow statement and these statements are true and do not contain any misleading statement and present true and fair view of the company’s affairs and are in compliance with accounting standards.

Hence, CEO and CFO are held accountable for all the financial statements.


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6. reporting on Corporate Governance : SEBI has also directed that a separate report on Corporate

Governance and compliance thereof should be circulated to the members of the company along with Annual Report and a quarterly compliance report to be submitted item by item to Stock Exchanges in a given format.


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7. Independent certification of Corporate Governance :

The Listed companies are also required to obtain certification from either statutory auditors or practicing company secretaries regarding compliance of conditions of Corporate Governance and annex it to the Director’s report which is sent to the members of the company annually.

Corporate GovernanceInformation to be placed before Board of

Directors ( As per Annexure 1A of Clause 49):

1. Annual operating plans and budgets of any updates.2.Capital budgets and updates.3.Quarterly results for company and its operating

divisions or business segments. 4. Minutes of meetings of all audit committees and

other committees of Board.

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Corporate Governance5. Information on recruitment and remuneration

of senior officers just below the board level, including appointment and removal of CFO and co. secretary.

6. Show cause, demand, prosecution and penalty notices which are materially important.

7. Fatal or serious accidents, dangerous occurencies , any material affluent or pollution problems.

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Corporate Governance8. Any material default in financial obligations to

and by the company or substantial non payment for goods sold by the company.

9. Any issue which involves any public or product liability claims of substantial nature including any order or judgement passing strictures on the conduct of the company .

10. Details of any joint ventue or collaboration agreement.

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Corporate Governance11. Transactions that may involve substantial

payment towards goodwill, brand equity or intelletual property.

12. Significant labour problems and proposed solution including wage settlement, implementation of VRS scheme if any.

13. Sale of investments, subsidiaries, assets which is not in normal course of business.

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Corporate Governance14. Quarterly details of foreign exchange

exposure and steps taken by the management to limit the risk of adverse exchange risk.

15. Non compliance of any regulatory , statutory or even listing requirements and shareholder services such as payment of dividends or delay in transfer of shares etc.

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Corporate GovernanceInstitutional Activism : CII , jointly with Institutional

Investors Advisory Services (IIAS) conducted survey on Institutional Investors perception of corporate Governance in India Companies : Their findings are as under :

How important is corporate Governance in overall assessment of a target companies :

84.2% Very important15.8% Some what imporatant.

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Corporate GovernanceWhat is most important parameter evaluated before

investing ? ( On a rating scale of 4 being highest )Quality of Financial Reporting : 3.84Reputation of promoter : 3.74Reputation of Management : 3.58Reputation of Board of Directors : 3.16

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Corporate GovernanceHow do you percieve companies with good corporate

Governance in terms of shareholder returns? 94.7 % associated good corporate governance with high

shareholder returns 5.3% with low returns.Have you invested in any co. purely because they have

high standards of corporate Governance ? Only 26.3% have invested purely on good corporate governance

as basis of investment73.7% on the basis of other variablesCorporate Governance is necessary but not sufficient

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Corporate GovernanceClassification of BSE 500 on the BASIS OF

Ownership structure :Promoter controlled : 72%PSUs : 13 %MNCs : 9%Professional Cos : 6%Level of corporate Governance rating 4 being

highest : MNcs : 3.67Professonal cos : 3.17PSUs : 1.75 Promoters Controlled: 1.35 NLDIMSR51

Corporate GovernancePerceived shareholder returns acros distinct set of

companies: Rating with 4 being highest:Professional companies : 3.73MNCs : 3.09Promoter conrolled : 2.27PSUs : 1.36Likely hood of investing Rating with 4 being

highest Professional Cos : 3.92MNCs : 3.45Promoter controlled: 2.78 PSUs : 2.33 NLDIMSR52

Corporate GovernanceBest Companies : : Rating with 8 BEING HIGHESTTata Group : 7HDFC : 5Infosys : 5HUL : 3Nestle : 3L & T : 3

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Corporate GovernanceVoting on shareholder resolutions :Are you ready to invest in non voting shares of

companies? Yes : 72.2%No.27.8%Do you have an internal team in your co to help

finalise the voting decision?Yes : 60 %No : 40%

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Corporate GovernanceFor what percentage of your portfolio companies do

you exercise voting rights?:60% would exercise voting rights for more than 75% of their

portfolio cos.33.3% exercise voting rights for 50% of their portfolio

companies.Most critical corporate actions : Rating with highest

being 3:Related party transaction : 2.79M&As 2.71Dilution of Equity 2.64 Change in Business : 2.57

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Corporate Governance Most frequently opposed corporate actions as being

percieved to destroy shareholder value: Intra group mergers : 80%Intra group Loans : 60%Issue of preferential warrants : 40%Board appointments : 20%Executive pay : 10%Entering new business : 10%

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Corporate GOVERNANCEEngagement with Investee compnaies :Engagement once a month or on quarterly basis for

significant investments:For companies where investment were above a self reported

minimum threshold : 25 % of the investors met senior management of investee co every month,

While 44% of the investos met senior management of investee co every quarter.

Engagement qquarterly or half yearly basis for smaller investment: 13% monthly, 33% quarterly and 47% every six months.

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CORPORATE govenanceHow do you respond to a company’s proposal that

you disagree with ? : 64% of the investors try to engage with the company and

reach a consensus29% of investors responded that they exit the co.What is the maximum time frame within which you expect

companies to address corporate governance concerns?Institutional investors have low tolerance for bad

corporate governance.

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Corporate Governance What has been your experience when you attempted to drive corporate

governance in investee companies : Excellent success rate : 10% Company responded positively : 70% Not responded positively : 20% Clause 49 and the effectiveness of Corporate governance mechanism : 83% of respondents indicated that clause 49 is serving its limited purpose. 62 % of respondents stated that existing framework of regulation in India is in

effective for enforcing rights and obtaining remedies for corporate governance key issues like sale of business , intragroup mergers, issue of preferentaial warrants etc which are not addressed by the regulations.

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Corporate GovernanceTo summarise, investors percieve companies with good

corporate governance as generating high shareholder returns, although corporate governance may only be necessary but not sufficient for generating high shareholder returns.

Investors are amenable to trading off slightly lower corporate governance levels for slightly better shareholder returns, if they believe their investee compnay is capable of doing so.

However, institutional shareholders have low tolerance for bad corporate governance, and often stand ready to leave the company when it commits an act of bad corporategvernance.

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Corporate GovernanceThose investors who are ready to stay in the investment

prefer to drive better corporate governance in investee companies , report positive response from their investees. The most contentious issues reported by institutional investors are intra group mergers and related party transactions.

Clause 49 only tries to institute a system of checks and balances in a company but does not address the most contentious issues faced by investors. Hence, corporate governance in India will improve only if it is enforced legally.

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Corporate GovernanceSelf Regulation :

Code of Conduct at Tata Group of companies :Please read the mail forwarded.

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Corporate Governance : Role of Directors

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Establish Vision, Mission and Values : Determine the company’s Vision and Mission to guide and

set the pace for its current operations and future development.

Determine the values to be promoted throughout the company.

Determine and review company goals.Determine company policies.

Corporate Governance : Role of Directors

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Set strategy and Structure : Review and evaluate present and future opportunities,

threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company.

Determine strategic options, select those to be pursued and decide means to implement and support them.

Determine the business strategies and plans that underpin the corporate strategy.

Ensure that company’s organizational structure and capability are appropriate for implementing chosen strategies.

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Corporate Governance: Role of Directors

Delegate to the Management:Delegate authority to management, and monitor

and evaluate the implementation of policies, strategies and business plans.

Determine monitoring criteria to be used by the board.

Ensure that the internal control are effective. Communicate with senior management

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Exercise accountability to shareholders and be responsible to relevant stakeholders:

Ensure that communications both to and from shareholders and relevant stakeholders are effective.

Understand and take into account the interest of shareholders and relevant stakeholders.

Monitor relations with shareholders and relevant stakeholders by gathering appropriate information and evaluation thereof.

Promote goodwill and support of shareholders and relevant stakeholders.

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Responsibilities:Exercise power in proper way: In furtherance of the

reason for which they were given those powers.Act in Good Faith: Act in a way which they honestly

believe to be in best interest of the company. In the event of conflict, interest of the company shall prevail.

Act with due skill and care.Consider the interest of the employees of the

company

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Corporate Governance: Role of DirectorsFour most common mistakes made:Failure to document reasons for decisions.Failing to “qualify” the experts upon which the director

relies: To ensure reasonable reliance, directors must have a basis for believing that matters treated by experts are within his or her professional or expert competence.

Failing to take the time for preparation and reflection that someone less sophisticated would take. Speed may be carelessness and not efficiency.

Buying into the fallacy that if board cant do every thing, it should not do anything

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How to minimize risk of bad decisions resulting in breach of duty to take care?

Document the analysis that goes into decisions and the recommendations to the board.

Maintain records which show that the board was familiar with the experience of its experts prior to their retention and select and retain experts in a manner which will preclude receiving advice tainted by conflict of interest.

Take enough time to analyze data before making decisions.Consider cost effective alternatives to obtain additional insight

and liability protection when facing an important decision.

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Corporate Governance: Scandals and Directors’ Responsibility

Are directors responsible for scandals?US experience:World Com Inc. : Bernard Ebbers CEO has just

been sentenced for 25 years in prison for orchestrating the record $11 billion accounting fraud. At the trial he denied any knowledge of massive book cooking at world com.

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John Rigas founder of cable giant Adelphia got 15 years in prison for looting his company and his son Timothy the formers chief financial officer, got 20 years in prison.

L. Dennes Kozlowski the former Tyco Chief and his own former finance chief will serve at least 8 1/3 years and perhaps as many as 25 years after they were convicted of stealing $600 million from Tyco.

Former Cendant Corp. Vice Chairman E. Kirk Shelton was slapped with 10 years in prison for his role in accounting scandal that cost the investors and the company more than $3 Billion.

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The judges when they see the real victims and see that there is really strong fraud in these companies, they are going to make somebody pay the price and some paid literally:

A New York judge signed off settlement deals that forced investment banks, auditor Arthur Anderson and former world com officials to cough up $6.1 billion, much of which will be divided between 8,30,000 investors and institutions who lost money in the accounting fraud. That settlement includes $25 million paid by former World Com board members out of their own pockets, and forfeiture of homes owned by Ebbers and former World Com finance chief Scott Sullivan.

And Investment Banks and former directors agreed to pay $7 Billion in a similar settlement over Enron collapse, including $13 million paid personally by 10 former board members.

Source: http://accounting.smartpros.com

http://accounting.smartpros.com/

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Issues in Corporate Governance:How independent does the board of Directors need

to be to enforce accountability?To whom should the management be accountable?Who should be on the Board?How should investors go about enforcing

accountability?

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Corporate GovernanceIssues in Corporate Governance:Who will watch the watchers?How should a company align the interest of all of its

employees with that of the company?Are we relying too much upon rules to encourage

good governance?What does it mean to govern when target is moving

one?


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Problems in Corporate Governance:Vanishing Companies: Between 1991 and 1996, out

of 3900 companies which offered IPO, 2500 have vanished

There are over 1.36 lakhs companies which are defaulting in complying with requirements of Company Law

There are about 2481 sick companiesThere is significant no of companies which have not

paid any dividends since 1996


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Reasons for Poor Corporate Governance in India: Feudal mid set that exists in India

Manifold restrictions set by GovernmentLack of concern for societySense of insecurity that prevails amongst the very

people who are supposed to inspire a sense of confidence about the company among the stake holder population

Greed and Ego

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Corporate Governance: ENRON CaseAuditors and Analysts who are external to the company

and the Board of Directors who are internal to the company have failed in discharging their duties.

Five issues have been identified:Chairman & CEOAudit CommitteeIndependence and Conflict of InterestFlow of InformationToo many directorships

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Corporate Governance: ENRON CaseChairman and CEO:In Enron, Kenneth Lay was both Chairman & CEO. For

a brief while the two positions were separated when Jeff Skilling functioned as CEO and when he resigned in August 2001, Lay again took both roles.

Mr. Lay claimed that he did not know too much of details of accounting fabrication that was going on.

For Lay and former CEO Jeffrey Skilling and former top accountant Richard Causey consequences of conviction are dire.

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Corporate Governance: ENRON Case

Independence and Conflict of Interests:Good governance requires that outside directors

maintain their independence and do not take any benefit from their board membership except remuneration. Otherwise it can create conflicts of interests. Enron had majority of directors who were independent but they compromised their independence. Six of 14 outside directors suffered conflict of interests.

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Corporate Governance: ENRON CaseConflict of Interest: Herbert S Winokur, is also Director of the Natco group

which is a supplier to Enron and its subsidiaries. He is also the Chairman of the Board’s Finance Committee which recommended that the Board suspend the company’s ethics code. The involvement of these directors receiving other benefits compromised their independence making one wonder whether they acted in the best interest of Enron.

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Corporate Governance: ENRON CaseConflict of Interest:John Mendelsohn was the President of MD Cancer

centre at the university of Texas. Enron and related entities donated $1.5mn (Rs. 7.2 Crores) to the centre since 1985.

William Powers, who also headed special investigation team, was the Dean of Texas law school. Enron had given $3 million (Rs. 14.4 crores) to the university since he became Dean. The law firm that works for Enron, Vinson & Elkins, has endowed a chair at the law school.

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Corporate Governance: ENRON CaseConflict of Interest:Robert Belfer, Chairman of Belfer Management bought a stake

in energy company from an Enron partnership thereby providing funds to start another.

Wendy Gramm (spouse of Republican Senator) was formerly the Chairman of commodities Futures Trading Commission of the Federal Govt. Enron’s trading in energy derivatives was exempt from regulation of CFTC. Shortly after that decision, she quit the commission and joined the Enron’s Board. He is presently Director of Regulatory Studies Programme at George Mason University. Enron donated $50,000 (Rs 24 Lacs) to that centre.

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Corporate Governance: ENRON CaseConflict of Interests:Lord John Wakeham, a former Minister for Energy in U.K. was

paid $7200 (Rs. 34.5 lakh for services as a consultant to Enron’s European Unit. When he was minister, he gave consent for building the country’s largest power plant at Teeside.

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Corporate Governance: ENRON CaseToo many Directorship:Being a Director, needs time and efforts. Although a

Board might meet only four or five times a year, the director needs to have time to read and reflect overall material provided to and make informed decisions.

Good governance suggests that an individual sitting on too many boards will not have time to do a good job.

Raymond Troubh, one of the director holds directorship of 11 companies.

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Corporate Governance: ENRON Case Audit Committee: The Board works through sub committees and audit committee is

one of them. It not only oversees the work of the auditors but is also expected to independently inquire into the workings of the organization and bring lapses to the attention of full board. The Enron audit committee failed in this regard.

Prof. Robert Jaedicke, a former accounting professor and Dean of Stanford University Business School, was Chairman of Audit Committee. Jaedicke, in addition to not performing his role as Chairman of Audit Committee, seconded the motion in the board to suspend the “code of ethics” of the company in order to allow an employee to set up special partnership. Setting up that entity amounted to a conflict of interest and was specifically prohibited by the company code.

Apart from Jaedicke, the Audit Committee comprised of five persons three of whom resided outside the country.

An Audit Committee is almost a “working committee” and needs to meet more frequently than a full board. Having non-residents on the committee hampered its functioning. One of the members, Ronnie Chan missed 75% of the meetings in 2001.

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Corporate Governance: ENRON CaseFlow of Information: Board is expected to take informed decisions for which

it needs important information in a timely manner. In case of Enron directors are pleading ignorance of the murky deals as way

of excusing themselves of the liability.The special investigation committee report says: “The Board was denied important information that might have led it to

action, but the Board also did not fully appreciate the significance of some of the specific information that came before it.”

If they did not have sufficient information, they should have gone seeking for it.

Report suggests that Enron operated about 3500 special purpose Entities, that is, partnership that shifted debt and losses of Enrons’ balance sheet.

If the directors did not understand what was being reported to them, it was their job to educate themselves more about it by asking the right questions and getting more information. This, they failed to do.

Comparative study :USA, UK, Germany and Japan

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Corporate Governance Comparative study :

Ownership Control RightsGovernance RulesMarket for corporate Control

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1. Ownership : USA : More than 50% of equity shareholding

with Institutional investors ie, pension funds, insurance funds, banks trusts etc.

About 30% of shareholding with private shareholders including founders.

Liquid market for holdings and rights of trading stocks in the market retained.


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UK : 67 % of equity shareholding with institutional shareholders including insurance cos, pension funds, unit trusts etc.

About 20% of shareholding with private shareholders.

Retention of liquid market and right of trading of stocks freely in the market


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Germany : 40 % of equity holding by large companies, followed by

Institutional holding 11%Banks 10%Private Shareholders 11%Balance by Govt and othersSmaller companies : Family ownedSubstantial cross holding amongst companiesNo role / limited role of private investorsIlliquid holdingsStrong control of com. Banks via proxy voting on behalf of

individual shareholders.


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Japan : Corporate cross shareholding by affiliated companies and major banks

60 to 80 % shareholding with institutional shareholders – Insurance cos, trusts and pension funds

20 to 30 % shareholding with private shareholders

Shareholders unwilling to trade for short term gains.


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2. Control Rights : USA :Management and control operations of

corporations delegated to professional managersUK: Management and control of operations

delegated to professional managers under governance and supervision of the Board.


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Control Rights cotd:Germany : Management and control of operations

delegated to Management Board ( Vorstand) under supervision and governance of Supervisory Board ( Aufsichtsrat)

Japan : Control rights by President and operating committee of top management although decision making as per” bottom up consensus method “


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3.Governance Rules :USA :Board members including CEO appointed by shareholdersAudit committee with independent Directorship set up

compulsory as precondition for listingCompanies to ensure 50 % outstanding shares voting at

AGMProxy voting by mail permitted Proportional representation for minority shareholders

interestPreemptive right to issue new shares to retain proportional

holdings.


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Governance Rules : Contd:UK: Board members appointed by shareholders Audit committee of at least 3 non executive

directors compulsory as listing requirementNo requirement of quorum on AGM


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Governance Rules : Contd.Germany : Two tier Board system : Supervisory

Board : (Aufsichtsrat ) : Discharging all supervisory functions with equal shareholders as well as employee / union representatives.

Management Board : (Vorstand ) : With Senior Executives directing the functions of Direction and Management.

Considerable autonomy to Management Board.Effectiveness and functioning of Management Board

monitored by supervisory Board.


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Governance Rules contd :JAPAN : Single tier majority of all inside directors’

Board with employee directors.Powerful Govt intervention by Ministry of Finance for

industrial acticvity and capital flows.Statutory auditors ( Kausayaku ) appointed by

shareholdersAppointment of 3-members audit committee.


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4. Market for corporate control:USA : Very strong capital markets Role of Banks in governance not importantManagement take take overs including hostile

take over are common.


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Market for corporate control Contd:UK : Active and strong capital marketM&As : Quite strong, active and commonUK Banks not interested to take equity stakes

hence insignificant role in corporate governance.


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Market for Corporate Control :Germany : No market control for corporates by

stock exchange.Direct holding of shares by individuals

discouraged due to tax on dividendsIncreased M&A activity due to German

unification.


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Market for Corporate Control contdJapan : No market for corporate controlFriendly M&As not uncommon. Minimal hostile

takeover activity.

Corporate Social Responsibility

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Corporate Social ResponsibilityWhat is corporate social responsibility?Pet projects of CEO ? – Medical camp / distribution of

woolen rugs during winter season or plastic sheets/ umbrellas during monsoon ?

Is it corporate philanthropy aimed at propaganda activity?

The modern corporate leaders look at corporate social responsibility as creative opportunity to fundamentally strengthen their businesses while contributing to society at the same time – Business partnering with society.

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Corporate Social ResponsibilityBefore looking into academic aspects of CSR, let

us look at practical examples of companies engaged in CSR:

Lupin - Winner of CSR award in 2003 :Co has set up Lupin Human Welfare and Research

Foundation (LHWRF) an NGO .LHWRF has set up 125 schools either singly or with

Govt help, provided for drinking water facilities in 80 villages and helped 25,000 people cross the poverty line.

NGO is headed by Sita Ram Gupta Ex Asst Eng of RSEB. NLDIMSR105

Corporate Social ResponsibilityGupta’s model is simple. He first creates a local

body at village level., typically 11 to 21 members depending on population of village. The village chooses the members of the local body – but it must compulsorily have women as well as representation of scheduled caste and scheduled tribe.

This local body figures out what is the priority there and LHWRF delivers it.

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Corporate Social ResponsibilityExample of Lakshman Singh aged 58 years – bee farmer :He was a poor bee farmer earning a few thousand rupees

from bee farming.He attended a seven day programme organised by Lupin on

bee farming.Gupta helped him in getting Rs.10000/- loan from local

bank to buy five honey combed bee boxes.Singh’s income kept growing- presently earning Rs.10 lakhs

a year ( in 2003) and his customers included Dabur. There are many like singh whomake 4-5 lakhs from bee farming.

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Corporate Social ResponsibilityThere are countless others whose wives have not died during

child birth as Lupin built a road connecting village to a hospital and numerous children who have gone to school.

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Corporate Social ResponsibilityWinner No.2 : Canara Bank : Lending a helping

hand :In 1960, way before nationalisation, Canara bank provided

educational loans at cheaper rates.About 47000 employees of Canara Bank donate Rs.3 /-per

month to a social cause of their choice – Rs.16.9 lakh annually.

Apart from this, Bank contributes Rs. 10 crores, nearly 1% of its profits.

Like Lupin, Canara bank CSR projects fall mostly within the ambit of community development. Its main thrust is on giving vocational skills to unemployed people.NLDIMSR109

Corporate Social ResponsibilitySince 1988, Cananra Bank has trained 1.3 lakh people.One big initiative is Rural Entrepreneurship Development

Institutes and set up 20 such vocational centres across India in partnership with Syndicate Bank and Dharmastala Manjunatheshwara Educational Trust.

Example of Ramakrishna who came out from such centre runs a shop at Bidadi near Jogaradoddi and makes Rs. 10000/- month selling wooden carvings.

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Corporate Social ResponsibilityWinner No.3 : Gujarat Ambuja Cement s: No charity

pleaseAmbuja Cement Foundation : a non profit organisation set

up by Gujarat Ambuja Cement in 1993 and now extends across seven states, touching the lives of 4.5 lakhs people in nearly 300 villages.

ACF does not associate with corporate philanthropy. Every project it undertakes involves some contribution by stakeholders .

ACF projects are simple and need based. So, water harvesting gains priority in Saurashtra.

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Corporate Social ResponsibilityIn Bhuj ( Kutch District) : It did not adopt any village during

earthquake for rehabilitation . Instead, it set up masonry camps so that locals could build houses and have career options.

ACF also cleared 12 wells near the coast of saline water.ACF encouraged a mentally challenged girl Hunny Saini to

play badminton. She won a gold medal at Dublin Spectal Olympics.

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Corporate Social ResponsibilityOther CSR Practices : ITC : CSR as business model :ITC’s “ Commitment Beyond the Market” initiative is

mutually beneficial model where social development is integrated with its businesses including cigarettes, paper and paper boards, food products and hotels.

While its farm and social forestry projects aim at increasing forest cover and ecological balance, for ITC, it creates a source of timber .

Its watershed development projects improve soil content in dry land, it gives ITC a bigger sourcing area for agricultural inputs.

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Corporate Social Responsibilitye Choupal : By providing on line market related

information , ITC not only empowers farmers, but also gains from more reliable and better quality inputs.

The company has written CSR policy and it has identified special people to head respective projects.

The Board reviews he projects once a year and corporate management committee headed by CEO Deveshwar reviews twice a year.

In the year 2003-04 , it spent Rs.17.94 crores on various projects, including on women empowerment and education.

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Corporate Social ResponsibilityWipro : Moulding a gneration :The Applying Thought in Schools project – aims to enhance

the quality of learning of school going children by providing six months training programme for teachers and school principals.

The focus is on encouraging independent and creative thinking building problem solving skills and helping children become what they want.

Wipro started the project closer home I five schools in Bangalore and then taken it to 80 schools across 10 states and trained 1800 teachers at a cost of 1.44 crore.

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Winners of CSR awards in 2006:Winner : SAIL : It has specific CSR policy Spends 2% of distributable surplus on projects including

education, water, roads and connectivity, Health care issues.Ist Runner up : Neyvelli Lignite Corporation : Major focus re employability of project affected persons. It also

looks at income generation of destitute, women and people affected with disability.

2nd Runner up : TCL : Works through trusts and societies that take up development work in the areas of natural resource management livelihood development , health care and education.

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Corporate Social Responsibility Awards for the year 2009 :Winner : Tata Steel

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Corporate Social ResponsibilitySurvey state of CSR in India :Why do corporates take up CSR aciviies ?Philanthropy 50% Image building 42%Employee morale 30%Ethics 30%

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Corporate Social ResponsibilityWhat are the major CSR activities ? Healthcare 17%Blood donation 16%Education 12%Opening schools 10%Relief Camps 10%

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Corporate Social ResponsibilityTarget Groups:Weaker sections of society 43 %Company employees 37%Children 34%Rural community 29%Disaster affected 27%Community near workplace 23%Ailing / sick people 20%

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Corporate Scial ResponsibilityHow do corporates implement CSR

activities?Donating money 81%Staff deputation 24%Staff volunteering 20%Company products 19%Enabling employment 17%Company facilities 25%

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Corporate Social ResponsibilityWhy some coporates do not take up CSR

activities ?Absence of policyLack of timeDifficulty of tracking and monitoringNo performance bench marksLack of continuity in action

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Corporate Social ResponsibilityReasons for not having corporate policy

on CSR :Never thought of it 44%Already contributing 39%No specific reason 39%Small size 24%Decision with upper mgt 21%Financial reasons 21%Doing business honestly 15%

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Corporate Social ResponsibilityMcKinsey Survey on Global CEOs about CSR :Do you believe that society has higher expectations for

business to take public responsibilities than it had 5 years agoResponse of CEOs who said yes (in % )By Region :Europe : 96America : 95Rest of the world :98By type of co :Public : 97 Private 91

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Corporate Social ResponsibilityWhich of the following stake holder groups have/ will have

the greatest impact on the way your company manages societal expectations? : Now In the next 5 years

Employees 48 39Customers 44 50Governments 30 32Local Communities 27 29Regulators / Govt agencies 26 25Media/ opinion leaders 22 24NGOs 20 27 NLDIMSR125

Corporate Social ResponsibilityStake holders impacting business : Now In next 5 yearsBoards 19 16Investment community 16 19Organised labour 7 7Suppliers 6 5

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Corporate Social ResponsibilityTrends influencing society’s expectations of

business :Which of the following trends do you think are most

important of business?Increasing Environmental Concern : 61Demand Supply gap of natural resources 38 Emergence of China / India on global market place : 37Increasing Technological connectivity 33Decreasing Trust in Business 18 Growing influence of NGOs 14 NLDIMSR127

Corporate Social ResponsibilityTrends influencing society’s expectations:

Contd

Backlash against Globalisation 12Over burdened Public Sector 12Off shoring 12Protectionism 06

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Corporate Social ResponsibilityWhich of the following global environmental, social and

political issues are the most critical to address for the future success of the business ?

Educational systems and talent constraints : 50%Poor public governance ( weak states, Conflict zones, corruption) : 44%Climate Change : 38%Making globalization’s benefits available : 36% to poor ( Bottom of pyramid product devl, marketing and

distribution)

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Security of energy supply : 35Access to clean water, sanitation : 12HIV/ AIDS and other public health issues 08

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Corporate Social ResponsibilityBarriers to CEO engagement :Which of the following barriers do you believe keep you, as

a CEO , from implementing and integrated and strategic company :

Competing strategic priorities : 43Complications of implementing strategy across various business functions : 39Lack of recognition from Fin. Markets : 25Differing definitions of CSR across regions / cultures : 22Failure to recognize link to value drivers : 18

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Corporate Social ResponsibilityDifficulty in engaging with external groups : 17Lack of effective communication infrastructure :13Lack of Board support : 07Employee resistance : 04

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Corporate Social ResponsibilityPerformance Gap :Which of the following activities should your company

implement to address environmental, social and governance issues? What co what co Performance

Particulars should do is doing GapFully embed these issues into strategy and operations 72 50 22Have Board discuss and act 69 45 24Engage in industry collaborations 56 43 13Embed these issues in global SCM 59 27 32NLDIMSR133