Corporate Governance
Jan 17, 2016
Corporate Governance
CORPORATE GOVERNANCE :
MEANING “Corporate Governance is the system by which companies are directed and controlled” ---- Cadbury Committee (U.K)
“Fundamental objective of corporate governance is the ‘enhancement of the long-term value while at the same time protecting the interests of other stakeholders.” ---- Kumar Mangalam Birla Committee (India)
Necessity1. Too much of power with few individual
2. Large scale diversion of funds to associated companies & risky ventures
3. Unfocussed business decisions leading to losses
4. Preferential allotment of sweat equity at low prices
5. Spinning off profitable business operations to subsidiary companies
Recent Happenings
World Com – Improper accounting of $3.9bn in expenses leading to bankruptcy
Enron – Off balance sheet deals used to hide the debt
AOL Warner – AOL division accused of improperly accounted for some advertising revenues
XEROX – Financial Fraud UTI – Indiscriminate investment by UTI
CORPORATE GOVERNANCE: ORIGIN
INTERNATIONAL
NATIONAL
The seeds of modern Corporate Governance were probably sown by the Watergate scandal in the United States. As a result of subsequent investigations, US regulatory and legislative bodies were able to highlight control failures that had allowed several major corporations to make illegal political contributions. This led to the development of the Foreign and Corrupt Practices Act of 1977 in USA .In May 1991, the London Stock Exchange set up a Committee under the chairmanship of Sir Arian Cadbury in an attempt to prevent the recurrence of such business failures
The Confederation of Indian Industry (CII) published India’s first comprehensive code on corporate governance (Desirable Corporate Governance: A Code) in 1998. This was followed by the recommendations of the Kumar Mangalam Birla Committee on Corporate Governance. This committee was appointed by the Securities and Exchange Board of India (SEBI). The recommendations were accepted by SEBI in December 1999, and are now enshrined in Clause 49 of the Listing Agreement of every Indian stock exchange. SEBI also instituted a committee under the chairmanship of Mr. N. R. Narayana Murthy which recommended enhancements in corporate governance. SEBI has incorporated the recommendations made by the Narayana Murthy Committee on Corporate Governance in Clause 49 of the listing agreement. The revised Clause 49 has been made effective fromJanuary 1, 2006
Origin
The Sarbanes – Oxley Act, 2002, a recent enactment in USA which deals with the Corporate Governance & Corporate Social Responsibilities has emphasized audit functions & financial disclosures.
Indian Context
Kumara Mangalam Birla Committee on Corporate Governance (2000) (SEBI Sponsored)
Naresh Chandra Committee on Corporate Governance (2002)
Narayana Murthy Committee on Corporate Governance
Clause 49 – Corporate Governance
SEBI has advised all stock exchanges to amend their listing agreements by inserting new clause 49 which deals with good corporate governance practices to be adopted by all listed private & public sector banks.
Contd…. Corporate governance implies that the
company would manage its affairs with diligence, transparency, responsibility and accountability, and would maximise shareholder wealth.
Companies are needed to at least have policies and practices in conformity with the requirements stipulated under Clause 49 of the Listing Agreement.
Board of Directors1. The Board of Directors should be composed
of Executive and Non-Executive Directors meeting the requirement of the Code of Corporate Governance.
Contd…. Audit Committee
1. The appointment of the Audit Committee is mandatory, and it’s a very powerful instrument of ensuring good governance in the financial matters
(The new section 292A incorporated in the Companies Act, 1956 made it obligatory for a company having paid up capital of rupees 5 crore or more to have an ‘audit committee’ comprising at least three directors & two third of the total members shall be non-executive directors)
Contd….
Shareholders’/Investors’ Grievance Committee
1. As a part of corporate governance, companies should form a Shareholders’/Investors’ Grievance Committee under the Chairmanship of a non-executive independent director.
Contd…. Remuneration Committee
1. The company may appoint a Remuneration Committee to decide the remuneration and other perks etc. of the CEO and other senior management officials as the Companies Act and other relevant provisions.
Management Analysis
1. Management is required to make full disclosure of all material information to investors.
Contd…. Communication
1. The quarterly, half-yearly and annual financial results of the Company must be sent to the Stock Exchanges immediately after they have been taken on record by the Board.
Auditors’ Certificate on Corporate Governance
1. The external auditors are required to give a certificate on the compliance of corporate governance requirements.
MAIN ISSUES IN CORPORATE GOVERNANCE
Role of Board of Directors
Composition of the Board
Audit Committee
Shareholder’s Committee
MANDATED CG GUIDELINES &DISCLOSURESBOARD OF DIRECTORS: FREQUENCY OF MEETINGS &
COMPOSITION
Board must meet at least at least four times a year
If the chairman of the Company is a non-executive then one-third of
the board should consist of independent directors, else 50%
Disclose the frequency of board meetings with their dates
Disclose the attendance record of all directors in board meetings
Full and detailed remuneration of each director (salary, sitting fees,
commissions, stock options and perquisites) must be fully disclosed
Loans given to executive directors must be fully disclosed to
shareholders in the annual report of the company
BOARD OF DIRECTORS: INFORMATION THAT MUST BE SUPPLIED
Operating plans, budgets and updates
Quarterly results of company
Minutes of the audit committee and other board committees
Recruitment and remuneration of senior officers
legal notices and claims, as well as any accidents, hazards,
pollution issues and labor problems
Details of joint ventures and collaborations
Transactions involving payment towards goodwill, brand equity
and intellectual property
BOARD OF DIRECTORS : AUDIT COMMITTEE
Must have minimum of three members
Chairman must be an independent director
Must have at least three meetings per year
Audit Committee functions
Oversight of the company’s financial reporting process
Appointment / removal of external auditor
Reviewing the annual financial statements
Discussion about scope and design of audits
Reviewing financial and legal risks
DISCLOSURES TO SHAREHOLDERS
Board composition
Qualifications and experience of directors
Information about directors
Warning against insider trading
Details of grievances of shareholders
Stock price data over the reporting year
Financial effects of different situations
Chapter reporting corporate governance practices
INDIA W.R.T SARBANES-OXLEYSarbanes-Oxley Indian situation What might be needed
Certification of annual accounts by CEO, CFO
At least two directors must sign, of whom one must be the Managing Director
Need to change to have MD/CEO plus Finance Director/CFO to sign
Fully independent audit committees
Fully non-executive, majority independent audit committees
Need to consider (i) fully independent (ii) tighter definition of independence
Disgorgement of CEO/CFO compensation in event of restatement
Accounts and profits once published cannot be re-stated
Need to see if ESOP payments need to be disgorged if there is a restatement
Prohibition of insider trading Prohibits insider trading Nothing is needed
Real time disclosure concerning changes in financials and operations
Listing agreement mandates companies to report quarterly results and material changes
Nothing is needed
Mandatory periodic review of company’s filings once every three years
No such provision Need to consider how this can be done without creating administrative hassles
Auditors prohibited from nine types of non-audit services to audit clients
These services are already prohibited in India Nothing is needed
Auditors to report to Audit Committee on critical accounting policies
Mandated by the listing agreement and the Companies
Nothing is needed
Rotation of audit partners every five years
No such provision exists A committee is considering such a change
Prohibition of insider loans to directors
Strict cap on insider loans to directors; requires prior government approval
Caps are stringent enough to prevent insider abuse
questionnaireS.No QUESTION RESPONSE
1 Current level of Corporate Governance in India Inc. (1-5)
2 Are you satisfied with Corporate Governance Control structure in India?
(Y/N)
3 To what extent Corruption & Bureaucracy responsible for cases of poor Corporate Governance?
(1-5)
4 To what extent our Rules & Regulations are capable to implement the Corporate Governance?
(1-5)
5 Is meeting the ends of company’s goals on the cost of Corporate Governance & Corporate social responsibility justified?
(Y/N)
6 How should be violations w.r.t Corporate Governance treated?a) Imprisonment & penalties b) Cancellation of
professional certificates
(a)/(b)
7 How much are you satisfied with the Corrective Steps taken by SEBI after “Satyam” case?
(1-5)
8 Is the role of Independent Director in the Company Board justified enough?
(Y/N)
9. Is it “The Inadequate Transparency” or “The Ignorance” that the small investors suffer the most when a case like “Satyam” opens up?
______________________________________________________________________________________________________________________________________________________
10. In the Case of Satyam both Internal & External Auditors failed to ensure True & Fair view of statement of Accounts. Suggest Parameters to ensure the same. ________________________________________________________________________________________________________________________________________________
CASE STUDY:ENRON case v/s SATYAM case
ENRON CaseThe Company discloses that it overstated its earnings by $567 million since 1997. Two company officials are fired. Enron, once one of the world's largest electricity and natural gas traders, files for Chapter 11 bankruptcy protection. Sloppy board oversight, imaginative accounting, off-balance sheet financing, and a criminal CFO are some of the reasons which was by the media. But it is more of come to mind. But those are superficial, not decisive, at root more consequences than causes according to an analyst. Enron did not fail because of creative bookkeeping, for instance, but was creative in bookkeeping because it was failing. Enron collapsed chiefly because its managers were paid to aim at the wrong financial measures, and consequently, its internal system of financial controls was a shambles.
SATYAM SagaOn January 7, Ramalinga Raju tendered his resignation and confessed to a close to Rs 7,800-crore accounting fraud. The episode has international ramifications. Satyam serves as the back office for some of the largest banks, manufacturers, and healthcare and media companies in the world, handling everything from computer systems to customer service. Shareholders have lost Rs 13,600 crore in Satyam shares in less than a month. The market capitalization fell to Rs 1,607.04 crore on January 9, 2008, from Rs 15,262 crore at the end of trade on December 16, 2008, the day when Satyam had announced the Rs-8,000 crore acquisition deal of two firms promoted by the kin of the IT firm’s former chairman Ramalinga Raju. According to the recent New York Times report, “Investigators looking into the fraud have found a maze of about 300 companies related to Raju that were used to siphon as much as $1 billion in cash from Satyam. From the very latest investigation news from Andhra Pradesh police who has Raju(Satyam CEO) in custody revealed a more interesting tactic used to loot the money. Out of 53,000 employees, 10,000 employees were fake and money was laundered thru the fake 10,000 paychecks every month. Also they found some involvement by external accounting company which helped to route this looted money to the proper place.It is the corruption and scamming mentality drove satyam scandal except the technique is different.