corporate governance part 1

8/13/2019 corporate governance part 1

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Business Ethics and Corporate Governance


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Quotation from the Arthshastra ( Chanakya)

Citizensnever support a weak company and

birds do not build nests on a tree that does

not bear fruits.


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Definition of Corporate Governance

Corporate governance can be defined as a system

by which the business entities are monitored,

managed and controlled.Corporate Governance is defined as the set of

processes , systems and principles which ensures

that the company is governed in the best interest ofthe stakeholders.


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OBJECTIVES OF CORPORATE GOVERNANCE :

Transparency in Business Transactions .

Statutory and Legal Compliances

Protection of Shareholders Interest .

Commitment to values and ethical conduct of theBusiness.

Developing appropriate strategies that result in

the achievement of stakeholder objectives bymaximizing the value to the stakeholders.


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The requirement of effective corporate governance are as follows :

Requirements Meaning

Due Process Doing things in a agreed anddocumented manner

Transparency Doing things in a open waywhich is appropriate

Accountability Having to answer for things onedoes

Compliance Having system to ensure that

things are done properly

Laws Meeting legal obligations

Security Having system to ensure that

protection of information


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SATYAM FIASCO

Role of Independent Director

Role of Audit Committee / Auditors

Role of Board of Directors

Role of Shareholders


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Satyam or AsatyamBrief History :

Founded in the year : 1987

Founder cum Chairman : B.Ramalinga Raju

Main Area : Information Technology Services in various

sectors .

Network Coverage : 67 Countries in 6 continents employs

approx 40000 IT professionals across development centers in

India, UK, UAE, Canada, Hungary, China, Japan etc .

Apart from Hyderabad it has development centers in

Bangalore, Chennai, Pune , Kolkata, Delhi Nagpur etc.

Interesting But True :

It served over 654 global companies, 185 of which are Fortune

500 corporations


8/19

CONFESSIONS OF RAJU

Dated 7thJanary,2009

1. Inflated (non-existent) cash and bank balances of

Rs 5,040 crores on the balance sheet as of

September 30, 2008.

2. An understated liability of Rs 1,230 crores on

account of funds.

3. An overstated debtors position of Rs 490 crores.

4. An accrued interest of Rs 376 crores which is

non-existent.


9/19

Satyam ShockerFor the September quarter, Satyam fraudently

reported a revenue of Rs 2,700 crores and an

operating margin of Rs 649 crores (24% of

revenues) as against the actual revenues of Rs

2,112 crores and an actual operating margin of

61 crores (3% of revenues).


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ROLE OF INDEPENDENT DIRECTORS

LISTING AGREEMENT

Clause 49 of its listing agreement :

SEBI had constituted a Committee on Corporate Governanceunder the chairmanship of N R Narayana Murthy to improve

standards of corporate governance in India. SEBI introduced

some major amendments based on the report on this committee

in 2003.


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Who is a Independent Director?

Defination :

Apart from receiving directors remuneration, does

not have any material pecuniary relationships or

transactions with the company, its promoters, its

directors, its senior management or its holding

company, its subsidiaries and associates which may

affect independence of the director.


12/19

Other points added to test the independency

1)He is not related to promoters or personsoccupying management positions at the board level

or at one level below the board.

2) He has not been an executive of the company in

the preceding three financial years.

3) He is not a material supplier, service provider or

customer or a lessor or lessee of the company.

4) He is not a substantial shareholder of thecompany owning two percent or more of the block

of voting shares


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Contd ..

He is not a partner or an executive or was not partner

or an executive during the preceding three years of

(a) the statutory audit firm or the internal audit firm

that is associated with the company and

(b) the legal and consulting firms that have material

association with the company


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Other Defination of independent Directors (by Other

Reports)THE CADBURY REPORT (1992)

Apart from their directors fees , they should be independent of

management and free from any business or other relationship

which could materially interfere with the exercise of their

independent judgment.

THE KUMARAMANGALAM REPORT (1998 )

Independent directors are those directors who apart from

receiving directors remuneration do not have any other

material pecuniary relationship or transactions with thecompany, its promoters, its management or its subsidiaries,

which in the judgment of the board may affect their

independence of judgment.


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Applicability of Clause 49

Composition of Board

The Board of directors of the company shall have an

optimum combination of executive and non-executive

directors with not less than fifty percent of the board ofdirectors comprising of non-executive directors

Where the Chairman of the Board is a non-executive

director, at least one-third of the Board should comprise

of independent directors and in case he is an executivedirector, at least half of the Board should comprise of

independent directors


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Reasons for having Independent Directors on Board

Not to pack the board with Yes Men .

Ensure legal and ethical behavior at the

company, while strengthening accountingcontrols.

Extend the reach of a company through

contacts, expertise, and access to debt andequity capital.


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Are the Independent Directors actually

Independent ?

Independent directors are nominated by the

management and are at the mercy of the

promoters and should be well known to thePromoters.

They need the support of promoters grop for

re-election.


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Satyam Case

Independent Directors Profile :

Mangalam Srinivasan (holds a Ph.D. in technology fromGeorge Washington University, a Master of Business Administration degree

(international finance and organization) from the University of Hawaii, a

Master of Arts degree (English) from Presidency College, Madras Universityand was an Advanced Special Scholar (astronomy and physics) at the

University of Maryland )

Vinod Dham (Entrepreneur) :acknowledged Father

of the Pentium microprocessor.

Krishna Palepu(Harvard professor)

M. Rammohan Rao (Indian School of

Business dean)


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Resignation of Independent Directors

Three independent directors resigned on 29th

December, 2008.

Comments :

The independent directors contended that

since the company was so highly appreciated

for its governance, they never suspected any

foul play took placed and believed the things

they were being told.

Ironic but True :

SATYAM won the Golden Peacock Global Award

for Excellence in Corporate Governance for 2008

corporate governance part 1

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