role of corporate governance in creating responsibel organizations (1)

8/12/2019 Role of Corporate Governance in Creating Responsibel Organizations (1)

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Corporate Governance inCreating Responsible

Organizations


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DEFINITIONS

Corporate Governance is the system by which companies are directedand controlled

Cadbury Report (UK), 1992

to do with Power and Accountability: who exercises power, on behalf whom, how the exercise of power is controlled.

Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest SykMemorial Lecture, 1993


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OECD DefinitionCorporate governance involves a set of relationships between acompanys management, its board, its shareholders and other stakeholders..also the structure through which objectives of the company are set, andthe means of attaining those objectives and monitoring performance aredetermined.

Preamble to the OECD Principles of Corporate Governance, 2004

fundamental objective of corporate governance is the enhancementof the long-term shareholder value while at the same time protecting theinterests of other stakeholders .

SEBI (Kumar Mangalam Birla) Report on Corporate Governance January, 2000

Indian Definition


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Economic

An Enterprises Triple Effect on Society

BusinessImpact

Sustainable Development Equal Opportunities

Waste Control Education &Culture

Emissions CommRege

Energy Use Human

Product Life-cycle Volu

Product Wealth ProductiveEthical

Value Generation Employment

Trading


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What is Corporate Governance?

The Manner in which a Corporation is Run

Achieving its Objectives

Transparency of its Operations

Accountability & Reporting

Good Corporate Citizenship

The Processes & Operating Relationships that Best Achieve OrganisationaGoals


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CORPORATE GOVERNANCE & CAPITAL MADRIVERS: A CONCEPTUAL FRAMEWORK

Listed Corporations(The Board & the Executive)

Regulators Government Stock Exchanges(SEBI/RBI) Legislation Listing Agreements

Market Operators Institutional Investors Press/Media(Rewards) (Pension Funds/Insce Cos) (Opinion Makers)

Lenders(Banks/

Depositors)

Shareholders/Stakeholders

REGULATION & LEGISLATION

Market Operations, Critique & Monitoring


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Evolution of the corporate-governancestructure

18001900

1950 2

Owner-manager

InvestorsGeneral AssemblyOwnerssrepresentativesExecutivemanagement

Investors

General assembly

Board (Directors)

Executive commity

BeneficiariesTrustees of fu

Invetment fun

General assem

Board

Executivemanagers

Managers


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History of Corporate Governance

Unlike South-East and East Asia, the corporate governance initiative in India wasnot triggered by any serious nationwide financial, banking and economiccollapseAlso, unlike most OECD countries, the initiative in India was initially driven by aindustry association, the Confederation of Indian Industry


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History of Corp Governance in India

1956 Companies Act: Limited governance and disclosure standards

1992 Formation of SEBI (Securities and Exchange Board of India)

1998 CII (Confederation of Indian Industry), Indias largest industry andassociation comes up with the first voluntary code of corporate governance

1999 SEBI sets up a commitee for good corporate governance under KumarMangalam Birla

2000 SEBI ratifies the commitees key recommendation and integrates them in clau49 of the Listing Agreement

2002 Establishment of the Narash Chandra commitee to examine variousgovernance issues

2006 Revision of clause 49

2008 Introduction of the Companies bill

2011 Reintroduction of revised Companies bill after Satyam scandal


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MODELS OF CORPORATE GOVERN


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Need for Corporate Governancemodel

Good corporate governance is very important for economic development

Therefore, quality of governance should be continuously improved

Thus to measure the quality we need a model

Existing Models Many different models of corporate governance around the world


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Models of Corporate Governance

The process is dynamic since the corporate governance structure in eachcountry develops in response to country-specific factors and conditions

These differ according to the variety of capitalism in which they areembedded

Developed Countries :

a. Anglo-US model

b. The Japanese model

c. The German model


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Anglo-US Model Developed within the context of the free market economy,assumes the separation of ownership and control in most publicly-held corporations .outsider model arms length investorInternal governance mechanisms

board of directors, elected by shareholders

External mechanismsmarket for corporate controlmonitoring by financial institutions

competition in product and input marketReliance on legal mechanisms to protect shareholder rightsShort term financial performance key


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THE GERMAN MODEL

Co-determination - partnership between capital and labor

Social cooperationThe two-tier board structure that consists of a supervisory board anexecutive board greater efficiency in separation of supervisioand managementCross shareholding in financial industrial groupsRole of banks as major shareholders

Primary sources of capital retained earnings and loans


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THE JAPANESE MODEL

Concentrated Ownership

The observation that there is little separation between ownership andcontrol

Holding structures and reorganizations used to deny free exercise ofownership rights

Inexperienced Directors

Government Intervention


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THE INDIAN MODEL

India has been rather slow in establishing corporate governance principleover the last two decades

Indias SEBI committee proposed that the management consider shareholders as the actual owner of the corporation and considthemselves as trustees.

It is about commitment to values, about ethical business conduct.

Indian approach is drawn from the Gandhian principle of trusteeship anthe Directive Principles of the Indian Constitution which is also prevaleAnglo US and other jurisdiction.


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Constituents of Corp GovernanceThe Board of Directors (BoD)

Pivotal role

Accountable to stakeholders

Directs management

The Shareholders & Stakeholders

To participate in appointment of directors

To hold the BoD accountable for governance through proper disclosures

The Management

To act on the direction of the BoD

To provide requisite information to the BoD for decision making

To implement and monitor control systems


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Principles of Corporate Governance


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Principles of corporate governance

Ensuring the Basis for an Effective Corporate Governance Framework

The Rights of Shareholders and Key Ownership Functions

The Equitable Treatment of Shareholders

The Role of Stakeholders in Corporate Governance

Disclosure and Transparency

The Responsibilities of the Board


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Laws and regulationsIn India Clause 49

It lays down guidelines for composition of the board including the number and

qualities of independent directors, code of conduct, and the constitution ofvarious committees (including audit), disclosures and suggested contents ofannual reports.

In UK Bribery Act (2010)

The Act has been described as "the toughest anti-corruption legislation in theworld", raising the bar above the standard set by the United States ForeignCorrupt Practices Act. Sections include General bribery offences, bribery offoreign public officials and failure of commercial organizations to preventbribery and Prosecution & penalties.

In USA Sarbanes-Oxley Act (2002)

The act contains 11 titles, or sections, ranging from additional corporate boardresponsibilities to criminal penalties, and requires the Securities and ExchangeCommission (SEC) to implement rulings on requirements to comply with thelaw. Sarbanes-Oxley Act-type laws have been subsequently enacted inJapan, Germany, France, Italy, Australia, Israel, South Africa, and Turkey.


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Are all CorporateGovernance Systems similar?


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Diversity in Corporate Governance

National, regional and cultural differences

Ownership structure and dispersion

The industry and market environment of the corporation

Firm size and structure

Life cycle variations including origin & development, technology &periodic crises and new directions


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Code/Guidelines of CorporateGovernance in India


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Board of Directors

Companies should issue formal letters of appointment to Non-ExecutiveDirectors (NEDs) and Independent Directors

Such formal letter should form a part of the disclosure to shareholders.

The roles and offices of Chairman and CEO should be separated, as far aspossible, to promote balance of power.

The companies may have a Nomination Committee comprising of majorityof Independent Directors, including its Chairman

Committee to ensure balance of ED and NED and to recommendappointment of ED

Nomination committee

Appointment of Board of Directors


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Board of Directors

Extensive limitations and guidelines on remuneration to Directors

Remuneration Committee to be formed should have responsibility for determining theremuneration for all executive directors and the executive chairman, including anycompensation payments, such as retirement benefits or stock options.

Limit of independent directorship to 7 companies if he/she is MD or WTD of a Public Li

All Independent Directors should provide a detailed Certificate of Independence at thetime of their appointment

An Individual may not remain as an Independent Director in a company for more than sixyears

A period of three years should elapse before such an individual is inducted in the samecompany in any capacity

No individual may be allowed to have more than three tenures as Independent Director

NED should have the option and freedom to interact with the company managementperiodically.

Remuneration Committee and Remuneration to NED/ED

Independent Directors


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At least 3 member ACB with ID as majority and Chairman to beindependent too.

All the members of audit committee should have knowledge of financial

management, audit or accountsACB to have power to have support, seek external assistance and accessto information

ACB to be part of the auditor interaction, appointment of auditors etc.,

To ensure that the Board's business processes and compliance mechanismare working, Secretarial audit to be undertaken by a competent authority

The Board should give its comments on the Secretarial Audit in its report tthe shareholders.

Mechanism for employees to report concerns about unethical behaviour,actual or suspected fraud, or violation of the company's code of conductor ethics policy.

Mechanism for Whistle Blowing

Secretarial Audit

Audit Committee - Constitution, Power and Roles


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Corporate Social Responsibilitiesand

Issues of Corporate Governance


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Corporate social responsibilityThe Corporate Social Responsibilities Policy should normally cover followingcore elements:

Care for all Stakeholders

Ethical functioning

Respect for Workers' Rights and Welfare

Respect for Human Rights

Respect for Environment

Activities for Social and Inclusive Development


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Issues in corporate governance

Value based corporate culture: For any organization to run in effec

it needs to have certain ethics, values. Long run business needs to havevalue based corporate culture.

Compliance with laws

Absence of Disclosure, transparency, and accountability: Distransparency and accountability are important aspect for goodgovernance

Improper Human Resource Management

Illegal Insider Trading

Misleading Financial Statements

Ownership-Management Separation


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Case Studies


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Barings Bank

Established in 1768 in London, EnglandBritain's oldest merchant bank, one of

the oldest in the world.

Some of its landmark dealings include the1802 Louisiana purchase, purchasingfoodstuff for the starving millions during

the great Irish famine, liquidating assets ofthe British empire during world war 2.

Was the personal banker of united states government and the Britishmonarchy for a number of years


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Barings Bank collapse in 1995

The activities of Nick Leeson, its head derivatives trader on the Japaneseand Singapore futures exchanges led to the downfall of Barings.

Internal auditing: Barings short-circuited normal accounting and interncontrol/audit safeguards. In effect, Leeson was able to operate with nosupervision

Corruption: Because of the absence of oversight, Leeson was able to maseemingly small gambles in the futures arbitrage market at Barings FutureSingapore and cover for his shortfalls by reporting losses as gains to Barinin London

Kobe earthquake: His luck ran out when the Kobe earthquake sent theAsian financial markets and with them, Leeson's investmentstailspin


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Barings Bank collapse :Aftermath

Leeson's activities had generated lossestotalling 827 million (US$1.3 billion), twicethe bank's available trading capital. Thecollapse cost another 100 million

ING, a Dutch bank, purchased Barings Bankin 1995 for the nominal sum of 1andassumed all of Barings' liabilities, forming

the subsidiary ING Barings.Leeson was eventually sentenced to six anda half years in prison in Singapore


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Satyam was established in 1987

4th largest IT company in India.

9% market share

53,000 employees

Revenue $2.1billion

First Indian company to be listed in threeInternational Exchanges: NYSE, DOW and

EURONEXT and boasted 185 Fortune 500

companies on its client list

Satyam share price was Rs.139.15

The Satyam Scandal


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The Satyam Scandal

Overstated assets on Satyam's balance sheet by $1.47 billion

Satyam overstated income nearly every quarter over thecourse of several years.

The results announced on October 17, 2009 overstatedquarterly revenues by 75 percent and profits by 97 percent.

The global head of internal audit also forged boardresolutions and illegally obtained loans for the company.

13000 fake salary accounts

The company's global head of internal audit created fakecustomer identities and generated fake invoices againsttheir names to inflate revenue


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The Satyam Scandal Confession and Aftermaths

The CEO was convinced that the gap in the balancesheets reached an unmanageable heights andcould not be filled in future by any means.

Satyam Computer crashed by Rs 139.15 or 77.69 percent to close at Rs 39.95, after the Chairman`sconfession

Bombay stock exchange fell 700 points

The declining Sensex recorded the biggest single-day loss in the past two months, after SatyamComputers Services, the country's fourth-largestsoftware developer, plunged around 80 per cent.


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The Satyam Scandal: its Impact on ITindustry

It made more difficult for other Indian IT service players to winbusiness.

Undoubtedly, it hurt the prospects of foreign money flowing intoIndia.

Global perception about Indian companies.

Satyam Scandal: Why did it happen ?


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Satyam Scandal: Why did it happen ?

Ambitious growth drive

Audit Failure

Deceptive reporting practices: Lack of transparency

ESOP`s issued to those who prepared fake bills

Excessive interest in maintaining stock prices

High risk deals that went sour

Above all, greed and lack of ethical values


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SATYAM SCANDAL


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LEHMAN BROTHERS SCANDAL


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WORLDCOM SCANDAL


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ENRON SCANDAL


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Some other Failures

No. Company Name Country Observable Causes of Fail

1 Enron USA Inflated earnings

2 WorldCom USA Expenses booked as capital expe

3 Tyco USA Looting by CEO, improper sha

4 Global Crossing USA Inflated corporate profits to defraud

5 Royal Ahold Netherlands Earnings overstated6 Parmalat Italy False transaction recorde

7 Wal-Mart USA Weaknesses in internal controls hagovernment investigations and class act

by employees.

8 Xerox USA Accelerated revenue recogni

The stories of corporate disasters


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Ineffective board

Dominant CEO (oneman show)

Disaster

Greed, hubris,irresponsibility

Poor strategy

Ill-judged acquisitions,over-expansions

I n a

d e q u a t e c o n t r o

l e n v

i r o n m e n t

Accidental external trigger

Conformist culture


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Lessons to be learnt

Rotation of auditing firms

Joint auditors to audit a companybeyond a certain size

Strengthening of quality review

Internal audit of financials by anexternal firm

Composition of Boards and quality andqualification of independent directors

Criteria for remuneration to keypersonnel

Education on ethical values


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The major challenges to corporategovernance reforms in India

Power of the dominant shareholder

Lack of incentives for companies to implement corporate governance reforms

Underdeveloped external monitoring systems

Shortage of real independent directors

Weak regulatory oversight including multiple regulators


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Conclusions

A transparent and timely communication between those who are involvedin decision making process must be the first tool that can prevent cases of

failure.The link between information and fraud prevention must go beyond theparticular mode of corporate governance chosen, organizational structureand control mechanisms applied.

the regulations remain ineffective if there is not a tandem withorganizational culture, supported by strong ethical principles

l


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Conclusions

Possible ways to avoid future cases of collapse may be the following

Separation of powers of the Chairman and CEO. Each has toactivate on its own pathway, otherwise we could reach a situationof excessive concentration of power and control capabilities of thesupervisory board to be diluted.

Integrity and missing of conflict of interest between managers, thatshould not target capital gains from the position they occupy,rather than wage remuneration they deserve.

The existence of a strict flow of information so that decision-makehave to receive timely and adequate information to perform theirduties.

Drawing concrete tasks and functions, especially in managementteams, where decisions require a sustained effort and a greatresponsibility.

R f


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References

http://business.gov.in/corporate_governance/index.php

http://www.bms.co.in/explain-the-models-of-corporate-governance/

OECD PRINCIPLES OF CORPORATE GOVERNANCE -2004

http://newsdawn.blogspot.in/2012/01/corporate-governance-in-india-aims-and.html

Corporate Voluntary Guidelines-2009 (Ministry of Corporate Affairs India)

The Divergent Corporate Governance Standards and the Need forUniversally Acceptable Governance Practices Syeedun Nisa,K

Anwar Warsihttp://www.ritholtz.com/blog/2013/03/worst-corp-scandals/#more-90147

http://www.karvy.com/articles/baringsdebacle.htm

role of corporate governance in creating responsibel organizations (1)

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