2. Corporate Governance
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 companies
There is significant no of companies which have
not paid any dividends since 1996
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3. Corporate Governance
Latest Developments:
Satyam
Libor fixation by Senior executives of international banks.
Common Wealth Games Scam
Telecom Licenses : 2G scam
Coal mining allocations scam Coalgate scam
Rajat Gupta – Insider Trading scam
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4. Corporate Governance
Consider this:
Moral failure pervaded our public life :
One out of every five members of Indian parliament elected
in 2004 had criminal charges against him
A 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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5. Corporate Governance
A 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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6. Corporate Governance
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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7. Corporate Governance
Reasons for Poor Corporate Governance in India:
Feudal mid set that exists in India
Manifold restrictions set by Government
Lack of concern for society
Sense 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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8. Corporate Governance
What is Corporate Governance?
Corporate Governance is the social, legal and
economic proceess in which companies
function and are held accountable. It is the
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system by which companies are run
-Cadbury Committee Report.
9. Corporate Governance
Corporate Governance is the exercise of
power in responsible way
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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.
10. Corporate Governance
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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11. Corporate Governance
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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12. Corporate Governance
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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13. Corporate Governance
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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14. Corporate Governance
Theories associated with
development of corporate
Governance :
Agency Theory
Transaction Cost Economics
Stakeholder Theory
Stewardship Theory
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15. Corporate Governance
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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16. Corporate Governance
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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17. Corporate Governance
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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18. Corporate Governance
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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19. Corporate Governance
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 .
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23. Corporate Governance
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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24. Corporate Governance
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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25. Corporate Governance
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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26. Corporate Governance
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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27. Corporate Governance
Scheme of Management under Companies
Act, 1956:
Separation of Ownership and Control:
Shareholders provide equity
Shareholders appoint Board of Directors
Board of Directors appoint team of management for
day to day operations
Shareholders also appoint independent professional
to report to them ie, Auditors.
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28. Corporate Governance
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 meeting
Powers to be exercised with the consent of the
members of the company.
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29. Corporate Governance
• 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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30. Corporate Governance
• 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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31. Corporate Governance
Representation of small Shareholders
For 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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32. Corporate Governance
Disclosures in Audit report : Compliance of
Accounting standards, payment of Interest,
Deposits, Dividends
Strengthening of Board :
Requirement of Independent Directors
If Chairman is Independent and Non executive :
One third of the members to be independent
If Chairman is Executive, half the members of
the Board to be Independent
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33. Corporate Governance
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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34. Corporate Governance
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
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35. Corporate Governance : Listing
Requirements
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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36. Corporate Governance
Audit Committee shall have minimum 3 members all being
Non executive and majority being Independent Directors
Chairman of Audit Committee to be Independent Director
The 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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37. Corporate Governance
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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38. Corporate Governance : Listing
Requirements
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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39. Corporate Governance : Listing
Requirements
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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40. Corporate Governance : Listing
Requirements
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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41. Corporate Governance
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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42. Corporate Governance
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.
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43. Corporate Governance
Information 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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44. Corporate Governance
5. 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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45. Corporate Governance
8. 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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46. Corporate Governance
11. 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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47. Corporate Governance
14. 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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48. Corporate Governance
Institutional 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 important
15.8% Some what imporatant.
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49. Corporate Governance
What is most important parameter evaluated before
investing ? ( On a rating scale of 4 being highest )
Quality of Financial Reporting : 3.84
Reputation of promoter : 3.74
Reputation of Management : 3.58
Reputation of Board of Directors : 3.16
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50. Corporate Governance
How 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 investment
73.7% on the basis of other variables
Corporate Governance is necessary but not sufficient
condition for investment
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51. Corporate Governance
Classification 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 : 3.67
Professonal cos : 3.17
PSUs : 1.75 Promoters Controlled: 1.35
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52. Corporate Governance
Perceived shareholder returns acros distinct set of
companies: Rating with 4 being highest:
Professional companies : 3.73
MNCs : 3.09
Promoter conrolled : 2.27
PSUs : 1.36
Likely hood of investing Rating with 4 being
highest
Professional Cos : 3.92
MNCs : 3.45
Promoter controlled: 52 NLDIMSR 2.78 PSUs : 2.33
53. Corporate Governance
Best Companies : : Rating with 8 BEING HIGHEST
Tata Group : 7
HDFC : 5
Infosys : 5
HUL : 3
Nestle : 3
L & T : 3
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54. Corporate Governance
Voting 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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55. Corporate Governance
For 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 : 2.79
M&As 2.71
Dilution of Equity 2.64 Change in Business : 2.57
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56. 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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57. Corporate GOVERNANCE
Engagement 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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58. CORPORATE govenance
How 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 consensus
29% 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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59. 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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60. Corporate Governance
To 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.
60 NLDIMSR
61. Corporate Governance
Those 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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62. Corporate Governance
Self Regulation :
Code of Conduct at Tata Group of companies :
Please read the mail forwarded.
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63. Corporate Governance : Role of
Directors
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.
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64. Corporate Governance : Role of
Directors
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.
64 NLDIMSR
65. 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
65 NLDIMSR
66. Corporate Governance: Role of Directors
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.
66 NLDIMSR
67. Corporate Governance: Role of Directors
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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68. Corporate Governance: Role of Directors
Four 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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69. Corporate Governance: Role of Directors
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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70. 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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71. Corporate Governance: Scandals and
Directors’ Responsibility
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.
71 NLDIMSR
72. Corporate Governance: Scandals and
Directors’ Responsibility
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
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73. Corporate Governance
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?
73 NLDIMSR
74. Corporate Governance
Issues 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?
74 NLDIMSR
75. Corporate Governance
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 companies
There is significant no of companies which have not
paid any dividends since 1996
75 NLDIMSR
76. Corporate Governance
Reasons for Poor Corporate Governance
in India: Feudal mid set that exists in India
Manifold restrictions set by Government
Lack of concern for society
Sense 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
76 NLDIMSR
77. Corporate Governance: ENRON Case
Auditors 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 & CEO
Audit Committee
Independence and Conflict of Interest
Flow of Information
Too many directorships
77 NLDIMSR
78. Corporate Governance: ENRON Case
Chairman 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.
78 NLDIMSR
79. 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.
79 NLDIMSR
80. Corporate Governance: ENRON Case
Conflict 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.
80 NLDIMSR
81. Corporate Governance: ENRON Case
Conflict 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.
81 NLDIMSR
82. Corporate Governance: ENRON Case
Conflict 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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83. Corporate Governance: ENRON Case
Conflict 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.
83 NLDIMSR
84. Corporate Governance: ENRON Case
Too 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.
84 NLDIMSR
85. 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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86. Corporate Governance: ENRON Case
Flow 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.
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87. Comparative study :
USA, UK, Germany and Japan
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Corporate Governance
89. Corporate Governance
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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90. Corporate Governance
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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91. Corporate Governance
Germany : 40 % of equity holding by large companies, followed
by
Institutional holding 11%
Banks 10%
Private Shareholders 11%
Balance by Govt and others
Smaller companies : Family owned
Substantial cross holding amongst companies
No role / limited role of private investors
Illiquid holdings
Strong control of com. Banks via proxy voting on behalf of
individual shareholders.
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92. Corporate Governance
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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93. Corporate Governance
2. Control Rights :
USA :Management and control operations of
corporations delegated to professional managers
UK: Management and control of operations
delegated to professional managers under
governance and supervision of the Board.
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94. Corporate Governance
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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95. Corporate Governance
3.Governance Rules :
USA :
Board members including CEO appointed by shareholders
Audit committee with independent Directorship set up
compulsory as precondition for listing
Companies to ensure 50 % outstanding shares voting at
AGM
Proxy voting by mail permitted
Proportional representation for minority shareholders
interest
Preemptive right to issue new shares to retain proportional
holdings.
95 NLDIMSR
96. Corporate Governance
Governance Rules : Contd:
UK: Board members appointed by shareholders
Audit committee of at least 3 non executive
directors compulsory as listing requirement
No requirement of quorum on AGM
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97. Corporate Governance
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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98. Corporate Governance
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
shareholders
Appointment of 3-members audit committee.
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99. Corporate Governance
4. Market for corporate control:
USA : Very strong capital markets
Role of Banks in governance not important
Management take take overs including hostile
take over are common.
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100. Corporate Governance
Market for corporate control Contd:
UK : Active and strong capital market
M&As : Quite strong, active and common
UK Banks not interested to take equity stakes
hence insignificant role in corporate governance.
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101. Corporate Governance
Market for Corporate Control :
Germany : No market control for corporates by
stock exchange.
Direct holding of shares by individuals
discouraged due to tax on dividends
Increased M&A activity due to German
unification.
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102. Corporate Governance
Market for Corporate Control contd
Japan : No market for corporate control
Friendly M&As not uncommon. Minimal hostile
takeover activity.
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104. Corporate Social Responsibility
What 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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105. Corporate Social Responsibility
Before 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
105 NLDRIMSSERB.
106. Corporate Social Responsibility
Gupta’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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107. Corporate Social Responsibility
Example 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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108. Corporate Social Responsibility
There 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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109. Corporate Social Responsibility
Winner 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 109 NLDIMSR skills to unemployed people.
110. Corporate Social Responsibility
Since 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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111. Corporate Social Responsibility
Winner No.3 : Gujarat Ambuja Cement s: No charity
please
Ambuja 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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112. Corporate Social Responsibility
In 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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113. Corporate Social Responsibility
Other 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.
113 NLDIMSR
114. Corporate Social Responsibility
e 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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115. Corporate Social Responsibility
Wipro : 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.
115 NLDIMSR
116. Corporate Social Responsibility
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.
116 NLDIMSR
118. Corporate Social Responsibility
Survey 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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119. Corporate Social Responsibility
What are the major CSR activities ?
Healthcare 17%
Blood donation 16%
Education 12%
Opening schools 10%
Relief Camps 10%
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120. Corporate Social Responsibility
Target 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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122. Corporate Social Responsibility
Why some coporates do not take up CSR
activities ?
Absence of policy
Lack of time
Difficulty of tracking and monitoring
No performance bench marks
Lack of continuity in action
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123. Corporate Social Responsibility
Reasons 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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124. Corporate Social Responsibility
McKinsey 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 ago
Response of CEOs who said yes (in % )
By Region :
Europe : 96
America : 95
Rest of the world :98
By type of co :
Public : 97 Private 91
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125. Corporate Social Responsibility
Which 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 39
Customers 44 50
Governments 30 32
Local Communities 27 29
Regulators / Govt agencies 26 25
Media/ opinion leaders 22 24
NGOs 20 27
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126. Corporate Social Responsibility
Stake holders impacting business :
Now In next 5 years
Boards 19 16
Investment community 16 19
Organised labour 7 7
Suppliers 6 5
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127. Corporate Social Responsibility
Trends influencing society’s expectations of
business :
Which of the following trends do you think are most
important of business?
Increasing Environmental Concern : 61
Demand Supply gap of natural resources 38
Emergence of China / India on global market place : 37
Increasing Technological connectivity 33
Decreasing Trust in Business 18
Growing influence of NGOs 14
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128. Corporate Social Responsibility
Trends influencing society’s expectations:
Contd
Backlash against Globalisation 12
Over burdened Public Sector 12
Off shoring 12
Protectionism 06
128 NLDIMSR
129. Corporate Social Responsibility
Which 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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130. Corporate Social Responsibility
Security of energy supply : 35
Access to clean water, sanitation : 12
HIV/ AIDS and other public health issues 08
130 NLDIMSR
131. Corporate Social Responsibility
Barriers 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 : 43
Complications of implementing strategy
across various business functions : 39
Lack of recognition from Fin. Markets : 25
Differing definitions of CSR across regions / cultures : 22
Failure to recognize link to value drivers : 18
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131
132. Corporate Social Responsibility
Difficulty in engaging with external groups : 17
Lack of effective communication infrastructure :13
Lack of Board support : 07
Employee resistance : 04
132 NLDIMSR
133. Corporate Social Responsibility
Performance 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 Gap
Fully embed these issues
into strategy and operations 72 50 22
Have Board discuss and act 69 45 24
Engage in industry collaborations 56 43 13
Embed these issues in global SCM 59 27 32
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