FAILURES OF CORPORATE GOVERNANCE

PREPARED BY:PARNIKA GUPTA(136)

ROOHI GUPTA(156)ISHA JAIN(173)

WHAT IS CORPORATE GOVERNANCE

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled.

The principal stakeholders are the shareholders, management, and the board of directors.

Other stakeholders include

labor(employees), customers, creditors

(e.g., banks, bond holders), suppliers,

regulators, and the community at large.

“Corporate governance is about owners and the managers operating as the trustees on behalf of every shareholder–large or small.”

- Narayana N. R. Murthy

Chief Mentor

Infosys Technologies Limited

FACTORS INFLUENCING CORPORATE GOVERNANCE

The ownership structure› Determines, to a considerable extent, how a

Corporation is managed and controlled.

The structure of company boards › The board of directors is responsible for

establishing corporate objectives, developing broad policies and selecting top-level executives to carry out those objectives and policies.

The financial structure › Proportion between debt and equity, has

implications for the quality of governance.

The institutional environment › Corporate governance mechanisms are economic

and legal institutions and often the outcome of political decisions.

ISSUES UNDER CG

Independent directors need significant empowerment Principle of trusteeship - appropriate protection for

minority shareholders Committees of boards may not have high

effectiveness Quality of Management Discussion and Analysis in

annual reports is moderate Audit committee skill-sets may need to be enhanced Corporate Social Responsibility - not yet top of mind

for Indian corporates

SYSTEMIC PROBLEMS OF CORPORATE GOVERNANCE

Demand for information Monitoring costs Supply of accounting information

Table : Recent financial irregularities

Company Country What went wrong

Ahold NL earnings overstated

Enron USA inflated earnings, hid

debt in SPEs

Parmalat Italy false transactions

recorded

Tyco USA

looting by CEO, improper share deals, evidence of tampering and falsifying business

records

WorldCom USA expenses booked as capital expenditure

Xerox USA accelerated revenue

recognition

GOVERNANCE FAILURE AT ENRON

ENRON CASE

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. Enron was attributed as the biggest audit failure.

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Jeffrey Skilling developed a staff of executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects.

CONTD…

CFO Andrew Fastow and other executives not only misled Enron's board of directors and audit committee on high-risk accounting practices, but also pressured Andersen to ignore the issues.

Arthur Andersen was charged with and found guilty of obstruction of justice for shredding the thousands of documents and deleting e-mails and company files that tied the firm to its audit of Enron.

CONTD…

Shareholders lost nearly $11 billion when Enron's stock price, which hit a high of US$90 per share in mid-2000, plummeted to less than $1 by the end of November 2001.

The U.S. Securities and Exchange Commission (SEC) began an investigation, and rival Houston competitor Dynegy offered to purchase the company at a fire sale price.

The deal fell through, and on December 2, 2001, Enron filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code.

Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history.

TIMELINE OF DOWNFALL

Enron had faced several

serious operational challenges,

namely logistical difficulties in running

a new broadband communications trading

unit, and the losses from constructing

the Dabhol Power project, a large power

plant in India

Credit rating downgrade

BANKRUPTCY

It was the largest bankruptcy in U.S. history and resulted in 4,000 lost jobs. Nearly 62% of 15,000 employees' savings plans relied on Enron stock that was purchased at $83 in early 2001 was worthless.

Dynegy Inc. unilaterally disengaged from the proposed acquisition of the company and Enron's credit rating fell to junk status.

http://en.wikipedia.org/wiki/File:EnronStockPriceAug00Jan02.jpg

ISSUES

Chairman and CEO : Good practice is to separate the roles of the Chairman of the Board and that of the CEO. In Enron, Mr Kenneth Lay was both the Chairman and CEO.

Audit Committee : It not only oversees the work of the auditors but is also expected to independently inquire into the workings of the organisation and bring lapses to the attention of the full board. The Board assigned the Audit and Compliance Committee an expanded duty to review the transactions, but the Committee carried out the reviews only in a cursory way.

Independence and conflicts of interest : Good governance requires that outside directors maintain their independence and do not benefit from their board membership other than remuneration. Otherwise, it can create conflicts of interest.

CONTD…

Flow of information : A board needs to be provided with important information in a timely manner to enable it to perform its roles. In the Enron situation, the directors are pleading ignorance of the murky deals as a way of excusing themselves of the liability.

Too many directorships : Being a director of a company takes time and effort. Good governance, therefore, suggests that an individual sitting on too many boards looks upon it only as a sinecure for he or she will not have the time to do a good job. Mr Raymond Troubh, one of the directors, is a Director of 11 public companies. It shows that time, effort and ability of the director will be divided to different other companies.

SATYAM SCAM

INTRODUCTION

Satyam Computer Services Ltd. is a consulting and information technology services company based in Hyderabad, India 

India's fourth-largest IT services firm The company offers information technology (IT)

services spanning various sectors, and is listed on the New York Stock Exchange and Euro next

It is considered as an icon among the IT companies and at one point had over a billion dollar revenue

The Satyam Computer Services scandal was publicly announced on 7 January 2009

SCAM….

Raju and his family held below 10% of the company’s equity

Raju allegedly used accounts opened in the names of relatives to divert money and carry out insider trading

Siphoning off funds from Satyam into Maytas Infra, Maytas Properties and various 325 firms floated by Mr. B Ramalinga Raju

Contd….

Its financial statements for years were totally false and cooked up 

Never had Rs 5064 crore (US$ 1.05Billion) shown as cash for several years.

Its liability was understated by $1.23Billions The Debtors were overstated by 400millions plus

SAD RESULTS

Satyam employees face a bleak future Satyam employees were told that there is no

assurance if they will receive salaries beyond January

The Sebi had in December given a clean chit to Satyam in the probe on violation of corporate governance law

CONCLUSION

Irrespective of 9% stake, a man could do a scam. A complete failure of Corporate Governance. To avoid this, a company needs to strictly follow

a proper system of corporate governance and rotating the auditors for every couple of years

Ironically, Satyam means "truth" in Sanskrit, but Raju's admission -- accompanied by his resignation -- shows the company had been feeding investors, shareholders, clients and employees a steady diet of asatyam (or untruth), at least regarding its financial performance.