Corporate governance Essay Example for Free

Corporate g everyplacenance EssayCorporate nerve is concerned with the structures and systems of control by which managers atomic number 18 held accountable to those who own a legitimate stake in an placement. It has become an increasingly important issue for organizations for tether main reasons. The separation of ownership and trouble control of organizations (which is now the norm except with very small businesses) means that most organizations operate within a hierarchy, or chain, of governance. This chain represents those groups that influence an organization through their involvement in either ownership or worry of an organization. Increased accountability to wider stakeholder involvements has also come to be increasingly advocated in bad-tempered the argument that corporations need to be more visibly accountable and/or responsive, non plainly to owners and managers in the governance chain but to wider social interest Corporate scandals since the late 1990s have increased public debate ab come out how polar parties in the governance chain should interact and influence each other. Most notable here is the relationship between sh arholders and the dining tables of businesses, but an equivalent issue in the public sector is the relationship between brass or public funding bodies and public sector organizations. As the key conclusion of Corporate governance drive the benefit of sh beholder of the fellowship all members of incorporate governance model responsible and accountable for driving this primary objective.1.1 Five Golden Rules of Corporate GovernanceAnd best corporate governance practice is not simply about a battle between distant, disloyal institutional shareholders and greedy directors but about the ethos of the organization and fulfilling its clearly agreed goals. 5 flamboyant rules of Corporate Governance of successful organization are1. Ethics a clearly ethical basis to the business2. Align seam Goals appropriate goals, arrived at through the creation of a suitable stakeholder termination making model 3. Strategic management an effective strategy process which incorporates stakeholder value 4. Organization an organization suitably structured to effect good corporate governance 5. radicaling reporting systems structured to provide transparency and accountability2 objects of studyObjective of this case study is to understand and critically examine flaws, misery of Corporate Governance on Satyam Computers strategic decisions. Also analyze what are the areas those can be influenced by proper Corporate Governance. This case also helps judgement Governments subprograms to tackle firms or intervene in firms functionality in the interest of internal and external stakeholders. Not only were there failures at the regulatory level, but also at the executive level. With no express computer code for corporate governance in India, the comp both(prenominal) failed to follow the industry standard best prac tices and as a result, collapsed.This study would be giveful in identifying the different kind of failures in a family owned business like Satyam and to policy makers in designing and implementing corporate governance frameworks for professionally managed as well as family managed businesses like Satyam. This case also reveals how wrong decisions can damage entire organization and dent the image of companionship. This case also focuses certain legal issues link up to roles and responsibilities of Chairman and other top management including critical role of freelance directors of organization. This incase Study focuses laws and gaps in the Indian context.3 Historical Evolution of the ships companySatyam was coordinated on June 24, 1987 as a private limited company providing software development and consulting run found out of Hyderabad, Andhra Pradesh. Ramalinga Raju and his brother Rama Raju were the promoters of the company. earlier commencement Satyam these duo were inv olved in other businesses like construction and textiles. This company was started with 20 employees 1991, this company went in for IPO where it was oversubscribed by 17 periods. similar year it could bag clients like John Deere co which is fortune 500 company. This is the first time it adopted offshoring model. 1993, Satyam formed joint ventures with clients like D B and also with GE. In 1996 Satyam started its on shore offices in US and Japan. And its first development center in New Jersey, 1998.By 1999 it had operations in 30 countries and was assessed SEI CMM Level 5, one of the very few companies to get this ac deferred paymentation by then. In 2000, Satyam grew by 10000 employees and got listed in NASDAQ ( National Association of Securities Dealers Automated Quotations) in 2001. 2004 Satyam was providing services in 45 countries with employee base of 15000. At that time Company was operating in mingled verticals with 18 development centers. Company crossed 1Billion reven ues by 2006. Satyams revenues grew to 2 billion by 2008 with a net income of 417mn. Gained 186 of fortune 500 customers. Sailing in the industry with 46000 employees by March 2008 with operations across 66 countries. By September 2008 it recorded revenue of 28.19Bn.3.1 Corporate Governance Practice at SatyamTo explain the level of commitment and ethics to society it was mentioned by some(prenominal) inside and outside members of Satyam that on the day of Ramalinga Raju fathers cremation he attended shareholders meeting. Companys ethics and level commitment were stressed in many annual reports. Corporate Governance was driven by its core values Associate Delight Investor Delight Customer Delight Pursuit of worthCompany stated that it believes that corporate governance practices provide an important framework to help the board of directors to fulfill its responsibilities Main duties of the board were to set strategic way to the company and leading the organization in the right dir ection there by ensuring long term interest of investor and other stakeholders of the company. Source Satyam Computer Services, Report on Corporate Governance 2006-07 For freelancer functioning, the board comprised of both executive and non-executive members. room also comprised several perpetrations like Investor Grievances committee Compensation Committee scrutinise CommitteeThe board was governed by code of conduct, which specified that all employees, directors needed to carry out their duties legally, honestly and ethically. It also specified all clauses that avoid any code of conflict etc.., Companys Whistle Blower policy was also in place.According to experts though sound policies were in place no(prenominal) of the directors were objecting Raju s decisions even though they are against the interest of investor. It continued till the time when Raju was planning to acquire Maytas where the biz of Target Company was not reorient to Satyam and also those companies are promot ed by Ramalinga Rajus family members. 3.2 component and Powers of Independent Directors (clause 49 of SEBI) SEBI had constituted a Committee on Corporate Governance under 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 on 26th August, 2003, in clause 49 of its listing agreement.Applicability of Clause 49All companies which were required to comply with the requirement of the erstwhile clause 49 i.e. all listed entities having a paid up share capital of Rs 3 crores and above or net worth of Rs 25 crores or more at any time in the history of the entity, are required to comply with the requirement of this clause. This clause does not apply to other listed entities, which are not companies, but body corporates, incorporated under other statutes. Clause 49 will apply to these institutions as long as it does not violate their respective statutes, guidelines or directi ves. Clause 49 of the SEBIs listing agreement relates to Independent Directors. Clause 49 Corporate Governance The company agrees to comply with the following(a) provisions I. mature of Directors (A) Composition of Board (i) The Board of directors of the company shall have an optimum combination of executive22 and non-executive23 directors with not little than fifty percent of the board of directors comprising of non-executive directors.(ii) Where the Chairman of the Board is a non-executive director, at least(prenominal) one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors. (iii) For the purpose of the sub-clause (ii), the expression independent director shall mean a non-executive director of the company who a. Apart from receiving directors remuneration, does not have any square financial relationships or transactions with the company, its promoters, its directors, its senior management or its belongings company, its subsidiaries and associates which may affect independence of the directorb. Is not related to promoters or persons occupying management positions at the board level or at one level below the boardx c. Has not been an executive of the company in the immediately preceding three financial years d. Is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following 1. The statutory audit firm or the internal audit firm that is associated with the company, and 2. The legal firm(s) and consulting firm(s) that have a material association with the company.e. Is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director and f. Is not a substantial shareholder of the company i.e. owning 2 percent or more of the block of voting shares. OTHER DEFINITIONS The Department of Company Affairs (DCA) h ad appointed a Committee headed by Mr. Naresh Chandra along with the distinct professionals from various fields. Apart from this, the Kumaramangalam Report also has suggestions about Independent Directors. Some definitions on Independent Directors. THE CADBURY REPORT (1992)Apart from their directors fees and shareholdings, 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 the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect their independence of judgment THE NARESH CHANDRA REPORT (2003)Apart from receiving directors remuneration, does not have any other material pecuniary relationships or transactions with the co mpany, its promoters and senior management. It is significant to mention hear that the Naresh Chandra Committee report has opined that the recommendations made by the Kumaramangalam Committee in relation to independent directors are not precise and cannot fulfill the requirement of the independency as compared to the International best-in-class definitions and other pragmatic factors.25 An independent director is characterized by the following principle features COMPANIES ACT, 1956 INDEPENDENT DIRECTORSUnder the Companies deed,1956 the powers and duties of directors has evolved under interpretation of various Sections such as 291, 297, 299, 397, 398, 408, 629A, to name a few which have recognised and upheld directors fiduciary duties to shareholders, to act with due care, skill and good faith. Sections 297 and 299, for example, are intended to eliminate possibility of conflict of interest. Unfortunately, the Act does not envisage a proper remedial regime, providing for rescission of underlying transactions, compensation for corporate and stakeholder losses, disgorgement of ill-gotten gains etc.Theoretically, some of these reliefs can be agitated for in the first place the Company Law Board but courts are hesitant to pass such drastic orders, in cases of such large, reputed companies ROLE OF INDEPENDENT DIRECTOR TOWARDS SHAREHOLDERS Corporate Governance principles all over and listing requirements assign tasks that have a potential for conflict of interest to independent directors, examples of these are integrity of financial and non-financial reporting, polish up of related party transactions, nominating address of board members and key executives remuneration. The shareholders, especially the minority shareholders, come out to independent directors providing transparency in respect of the disclosures in the working of the company as well as providing balance towards resolving conflict areas.In evaluating the boards or management decisions in respect of employees, creditors and other suppliers of major service providers, independent directors have a significant role in protecting the stakeholders interests. One of the mandatory requirements of audit committee is to look into the reasons for default in payments to deposit holders, debentures, non-payment of declared dividend and creditors. get on they are required to review the functioning of the Whistle Blower mechanism and related party transactions. These, essentially, safeguard the interests of the stakeholders 4 Major strategic decisions and its consequence declination 16th 2008, Chairman Ramalinga Raju in a surprise move announced intent to acquire Maytas Properties and Maytas construction companies for a whopping 1.6Bn. While it is evident that these two companies are promoted by Ramalinga Raju s family in the industry circles it was not clear why should a IT services company focus on infra and position business. As the decisions was opposed by investors and clear indicati on of market fluctuation made Ramalinga Raju to revert his decision in 12 hours. Share prices plunges by 55% on concerns about Satyams corporate governance.In a surprise move, the conception Bank announced on celestial latitude 23, 2008 that Satyam has been gin millred from business with World Bank for eight years for providing Bank staff with improper benefits and charged with data theft and bribing the staff. Share prices fell another 14% to the lowest in over 4 years. The lone independent director since 1991, US academician Mangalam Srinivasan, announced resignation followed by the resignation of three more independent directors on December 28 i.e. Vinod K Dham (famously known as father of the Pentium and an ex Intel employee), M Rammohan Rao (Dean of the renowned Indian School of Business) and Krishna Palepu (professor at Harvard Business School)6.At last, on January 7, 2009, B. Ramalinga Raju announced confession of over Rs. 7800 crore financial fraud and he resigned as chair man of Satyam. A week after Satyam founder B Ramalinga Raju s immoral confession, Satyams auditors Price Waterhouse finally admitted that its audit report was wrong as it was based on wrong financial statements provided by the Satyams managements On January 22, 2009, Satyams CFO Srinivas Vadlamani confessed to having inflated the number of employees by 10,000 Satyam share price have seen sharp decline within hours of the outburst of the incident and set ahead deteriorated after Ramalinga Rajus confession Source http//akpinsight-ijcbs.webs.com5 Implementation of strategic decisionOn 30th Sep 2008, Satyam reported that it had cash takes of 1.2Bn and on December 16th company expressed intent of acquiring Maytas Properties and Maytas Constructions for 1.6Bn. While Maytas infra a public listed company operating for two decades Maytas properties s only 6 months old which declared a revenue of 7.37Bn and net profit of 370 mn. On December 16th 2008 Satyam board approved acquisition of Ma ytas. The cash reserve to be used by Satyam to buy 51% of equity stake in Maytas infra for 1.3Bn USD and for Maytas properties 300 mn USD. Satyam planning to acquire 31% of the holding of the Raju family in Maytas Infra and another 20% through open offer to shareholders. The promoters held 36.64% equity stake in Maytas infra . Satyam planning to pay 475 Rs per Share which was 1.25% less than closing value December 16th and open offer made at 525 rs from the existing Maytas infra shareholders.After approval from board Ramalinga Raju announced this as a strategic move to de-risk core business by bootstrapping a new business vertical. He also called out that this would de-risk the recessional impacts on the accredited vertical of core business. Announcement however trigger negative reaction from industry, investors and stock markets. Satyams stock got severe beating on December 16.The ADR fell from 12.55 to 5.70 after this announcement . On Bombay Stock Exchange the stock fell from 22 6 to 158 rs. It went down further to 134 on December 24th 2008. The decision attracted conduct of criticism that promoters who has only 8.74% equity stake in the company were being allowed by the board to transfer a considerable amount of specie from Satyam to Maytas where Ramalinga Raju s family own more stake.Analysts called that this is act of siphon to move cash from Satyam into a place where Raju s family has more stake. Experts also called that if board is convinced with the deal then it is their responsibility to inform major investment institutions which is a good sign of proper corporate governance. Valuation of Maytas was not transparent and this was not even advised to investors in advance. Investors called this process as act of misuse of Satyam funds and its a nepotism. Registrar of Companies asked Satyam to submit minutes of board meeting for validity and review held on December 16th 2008. However Satyam could not provide minutes of meeting in the said deadline give n by RoC.These reactions compelled Satyam to roll back the decision within 12 hours .These accusations lead to few international issues where the long battle between British Virgin Island Based Upaid system and Raju and Satyam CFO. There are three cases breach of contract, forgery filed by filed by UPaid and one disparagement filed by Satyam. On December 23 2008 World Bank announced that it will bar Satyam to take any of its contracts for next 8 years due to improper invoice and benefit to employees.It was reported that Satyam sold its preferential shares to World Bank CIO. Before Maytas controversy got over DSP-Merlynch announced that it is terminating its advisory agreement with Satyam. In its communication it said considering various strategic options it had terminated its advisory agreement also quoted that it was to their understanding that there are accounting irregularities which prompted them above decision. Analysts said that this move compelled Raju to confess as SEBI aske d DSP-Merlynch asking why it had to withdraw the agreement.6 Merits/Flaws of implementationFollowing are the Governance Flaws noticed in the case of Satyam computer Services Limited6.1 Unethical ConductIt is evident that founder of the company wanted to make money any which way by avoiding taxes, cooking books , creating false payrolls and pay offs. Shareholders, employees and clients realized steady diet of (A)Satyam. He was not following the spirit behind its name. along with his brother Rama Raju who is his also managing director of the company disguised all this from companys board , senior managers and auditors for several years. Confession revealed the fraudulent and unethical look of the duo who bagged many awards and rewards for his best corporate governance including prestigious Golden Peacock award. Both CEO and CFO charged for putting self-interests ahead of companys interests.6.2 A case of insider tradingBoth central and state investigation agencies and also audit firms revealed and established that promoters indulged in the nastiest kind of insider trading of companys shares to raise money for building large land banks. It was established that money raised by Ramalinga Raju and Rama Raju along with his relatives used to buy lands in 330 binami companies.6.3 Case of False Books and Bogus AccountsThe Serious Fraud Investigation Office (SFIO), 23 a multi-disciplinary investigating arm of the Ministry of Corporate Affairs, set up in 2003 with officials from various law enforcement agencies, was asked to investigate the fudging of accounts as admitted by B. Ramalinga Raju. the consent of the board was unanimously accorded after which Raju proposed the merger of MIL and MPL to the shareholders, which came in for stiff resistant, and issue of corporate governance was raised. A couple of weeks later, Ramalinga Raju dropped a bombshell by sending a letter of admission to SEBI and the board of directors that he had fudged the accounts of Satyam and that th e balance sheet as on September 30, 2008 carried an inflated (non-existent) cash and bank balances of Rs 5040 crore, non-existent interest of Rs 376 crore and understated liability of Rs 1230 crore Source http//www.applied-corporate-governance.com/best-corporate-governance-practice.html6.4 Lax BoardThe Satyam Board was composed of chairman-friendly directors who failed to question managements strategy and use of leverage in recasting the company they were also extremely slow to act when it was already clear that the company was in financial distress. The glue that held the board members together was Ramalinga Raju. Each of the board members were there on his personal invitation and (that) made them ineffective. The Board ignored, or failed to act on, critical information related to financial wrongdoings before the company ultimately collapsed. It was only when Ramalinga Raju in the December, 2008 announced a $1.6 billion bid for two Maytas companies i.e. Maytas Infra and Maytas Prop erties, and while the share market reacted very potently against the bid and prices plunged by 55 % on concerns about Satyams corporate governance, that some of the independent directors came into action by announcing their withdrawal from the Board6.5 Unconvinced Role of Independent DirectorsThe Satyam episode has brought out the failure of the present corporate governance structure that hinges on the independent directors, who are supposed to bring objectivity to the superintendence function of the board and improve its effectiveness. They serve as watchdogs over management, which involves keeping their eyes and ears open at Board deliberations with critical eye raising queries when decisions twine wrong. Stakeholders place high expectations on them but the Satyams case reveals such expectations are misplaced. Six of the nine directors on Satyams Board were independent directors including US academician Mangalam Srinivasan (the independent director since 1991), Vinod K. Dham (f amously known as father of the Pentium and an ex Intel employee), M Rammohan Rao (Dean of Indian School of Business), US Raju (former director of IIT Delhi), T.R. Prasad (former Cabinet Secretary) and Krishna Palepu (professor at Harvard Business School).They were men of standing reputation. To avoid any controversy, the two founder directors did not participate in the decision making process for the reason that the provisions of the Companies Act and SEBI regulations mandate presence of only disinterested directors in board meeting where the agenda of such a nature is discussed. This naturally causes suspicion on the role put to deathed by the independent directors present in that meeting. What concerns everyone is that those independent directors allowed themselves to be party to the mysterious designs of the promoter directors. It is hard to believe that such eminent and experienced personalities could not discover the well-planned massive fraud and manipulations.6.6 Questionab le Role of Audit Firm/CommitteeThe true role of audit committee in prcis is to check out transparency in the company, that financial disclosures and financial statements provide a correct, sufficient and creditable picture and that, cases of frauds, irregularities, failure of internal control system within the organization, were minimized, which the committee failed to carry out. The timely action on the information supplied by 18 a whistleblower to the chairman and members of the audit committee (an e-mail dated December 18, 2008 by Jose Abraham), could serve as an SOS to the company, but, they chose to keep silent and did not report the matter to the shareholders or the regulatory authorities. The Board members on audit committee who failed to perform their duties alertly be therefore tried out under the provisions of the Securities Contracts (Regulation) Act, 1956 (an unimaginable fine extendable to rupees 25 crore by also including imprisonment for a term, which may extent to 1 0 years).6.7 Suspicious Role of Rating AgenciesCredit rating agencies have been consistently accused of their lax attitude in assessing issuers and loose misleading ratings without thorough analysis, as has been the case of Enron and now in Satyam, they failed to warn market participants about the deteriorating condition of company. On December 2, 2001, Enron Corporation, the USAs seventh largest corporation declared bankruptcy when it was rated investment grade by all the credit rating agencies even four days before its bankruptcy. None of the watchdogs barked, including the credit rating agencies, which had greater access to Enrons books.In the case of Satyam, credit rating agencies have been heavily criticized as regards their role and for the accuracy of their ratings. The rating agencies were allowed to look into companys books for making assessments but they never investigated the financial condition of Satyam. The rating agencies displayed lack of due diligence in their cove rage and assessment of Satyam. They based their analysis on fraudulently prepared and audited financial statements and thereby failed to warn investors about Satyams deteriorating condition.6.8 Questionable Role of BanksThe ICAI Probe Panel has hit out at banks for not doing due diligence on Satyam Software Services Ltd before giving it loans. While sanctioning short term loans why not the banks posed any question as to why the company which was supposedly cash rich as per the financial statements was taking loans from them. The Panel wondered why the government put Deepak Parikh on its Board despite his HDFC group being a major creditor to the company. The banks that gave loans to Satyam during 2000-08 despite the company claiming huge surpluses were HDFC Bank (Rs 530 Crore, Citibank (223.87 Crore), Citicorp Finance (Rs222.28 Crore), ICICI Bank (Rs 40 Crore), and BNP Paribas (Rs 20 Crore) totaling Rs 122.161 Crore.6.9 Fake AuditPricewaterhouseCoopers (PwC)s audit firm, Price Waterh ouse, was in the auditor for Satyam and have been auditing their accounts since 2000-01. The fraudulent role played by the PricewaterhouseCoopers (PwC) in the failure of Satyam matches the role played by Arthur Anderson in the collapse of Enron. S Goplakrishnan and S Talluri, partners of PwC according to the SFIO findings, had admitted they did not come across any case or vitrine of fraud by the company. However, Ramalinga Raju admission of having fudged the accounts for several years put the role of these statutory auditors on the dock. The SFIO report stated that the statutory auditors instead of using an independent testing mechanism used Satyams investigative tools and thereby compromised on reporting standards.