Corporate governance Essay Example for Free

embodied constitution Essay merged g all oern handst activity is concerned with the structures and systems of discover by which managers argon held accountable to those who have a legitimate stake in an organization. It has become an increasingly important issue for organizations for three main reasons. The separation of ownership and management control of organizations (which is now the norm except with very sm any disdaines) means that most organizations operate within a hierarchy, or chain, of politics. This chain represents those groups that influence an organization through their involvement in either ownership or management of an organization. Increased accountability to wider stakeholder interests has also come to be increasingly advocated in particular the object that green goddesss need to be more visibly accountable and/or responsive, non only to owners and managers in the governance chain but to wider social interest Corporate s cornerstonedals since the late 1990s have increased unrestricted debate about how different parties in the governance chain should interact and influence each opposite. almost notable here is the relationship between sh beholders and the postings of businesses, but an equivalent issue in the public bena is the relationship between government or public funding bodies and public sector organizations. As the primal purpose of Corporate governance drive the benefit of sh areholder of the go with all members of corporeal governance model responsible and accountable for driving this primary objective.1.1 Five Golden Rules of Corporate faceAnd beat corporate governance practice is not simply about a battle between distant, unpatriotic institutional shareholders and greedy handlers but about the ethos of the organization and performing its clearly agreed goals. 5 golden rules of Corporate cheek of successful organization are1. Ethics a clearly ethical basis to the business2. Align Business Goals appropriate goals, arrived at through the creation of a suitable stakeholder decision reservation model 3. Strategic management an effective strategy process which incorporates stakeholder value 4. Organization an organization fittingly structured to effect good corporate governance 5. Reporting announceing systems structured to provide transparentness and accountability2 Objectives of teachingObjective of this national study is to down the stairsstand and critically examine flaws, mischance of Corporate Governance on Satyam Com regulariseers strategic decisions. Also analyze what are the areas those can be influenced by proper Corporate Governance. This typeface also helps understanding Governments determinations to tackle firms or come in in firms functionality in the interest of inherent and external stakeholders. Not only were in that respect failures at the regulatory direct, but also at the decision maker level. With no express polity for corporate governance in India, th e high society failed to follow the industry standard best practices and as a result, collapsed.This study would be useful in identifying the different kind of failures in a family owned business care Satyam and to policy makers in designing and implementing corporate governance frameworks for professionally managed as well as family managed businesses a worry Satyam. This case also reveals how ravish decisions can damage entire organization and dent the image of guild. This case also focuses certain legal issues related to characters and responsibilities of Chairman and early(a)wise top management including critical role of fencesitter directors of organization. This Case Study focuses laws and gaps in the Indian context.3 Historical Evolution of the connectionSatyam was incorporate on June 24, 1987 as a private limited connection providing software development and consulting assistants base out of Hyderabad, Andhra Pradesh. Ramalinga Raju and his pal Rama Raju were the promoters of the lodge. Before starting Satyam these duo were involved in other businesses like complex body part and textiles. This company was started with 20 employees 1991, this company went in for IPO where it was oversubscribed by 17 times. Same grade it could bag clients like John Deere co which is fortune 500 company. This is the first time it adopted offshoring model. 1993, Satyam organize 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 aim 5, one of the very few companies to get this accreditation by then. In 2000, Satyam grew by 10000 employees and got listed in NASDAQ ( field of study Association of Securities Dealers Automated Quotations) in 2001. 2004 Satyam was providing services in 45 countries with employee base of 15000. At that time beau monde was operating in vario us plumbs with 18 development centers. guild crossed 1Billion revenues by 2006. Satyams revenues grew to 2 billion by 2008 with a send away income of 417mn. Gained 186 of fortune 500 customers. Sailing in the industry with 46000 employees by March 2008 with operations crossways 66 countries. By September 2008 it recorded revenue of 28.19Bn.3.1 Corporate Governance Practice at SatyamTo explain the level of commitment and morals to society it was mentioned by both intimate and outside members of Satyam that on the day of Ramalinga Raju gravels 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 ExcellenceCompany stated that it banks that corporate governance practices provide an important framework to help the circuit card of directors to fulfill its responsibilities of import duties of the board were to set strategic steering to the company and leading the organization in the right direction there by ensuring abundant term interest of investor and other stakeholders of the company. Source Satyam Com regorgeer Services, Report on Corporate Governance 2006-07 For independent functioning, the board comprised of both executive and non-executive members. board also comprised some(prenominal) committees like Investor Grievances committee Compensation Committee analyse 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 plaza.According to experts though sound policies were in place none of the directors were objecting Raju s decisions even though they are against the interest of investor. It act till the time when Raju was planning to acquire Maytas wh ere the biz of Target Company was not aligning to Satyam and also those companies are promoted by Ramalinga Rajus family members. 3.2 Role and Powers of strong-minded 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 more or less major amendments based on the report on this committee on 26th August, 2003, in clause 49 of its itemisation agreement.Applicability of Clause 49All companies which were required to comply with the requirement of the onetime(prenominal) clause 49 i.e. all listed entities having a paid up share capital of Rs 3 crores and supra 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 consecrate to other listed entities, which are not companies, but body corporates, incorporated under other statutes. Cl ause 49 will apply to these institutions as long as it does not violate their respective statutes, guidelines or directives. Clause 49 of the SEBIs listing agreement relates to sovereign Directors. Clause 49 Corporate Governance The company agrees to comply with the interest provisions I. Board 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 less 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 triplet of the Board should comprise of independent directors and in case he is an executive director, at least half(a) 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 material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which whitethorn instill 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 old age d. Is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the chase 1. The statutory canvas 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 tw o percent or more of the terminate of voting shares. OTHER DEFINITIONS The Department of Company Affairs (DCA) had appointed a Committee headed by Mr. Naresh Chandra on 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 away 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 receivi ng directors remuneration, does not have any other material pecuniary relationships or transactions with the company, 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 Act,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 re founderable care, skill and good faith. Sections 297 and 299, for example, are intend to eliminate possibility of conflict of interest. Unfortunately, the Act does not envisage a proper remedial regime, providing for recission of underlying transactions, compensation for corporate and stakeholder losses, disgorgement of ill-gotten gains etc.Theoretically, some of these reliefs can be agitate for before 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, review of related party transactions, nomination of board members and key executives remuneration. The shareholders, especially the minority shareholders, look to independent directors providing transparence in respect of the disclosures in the working of the company as well as providing counterweight to wards 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 and only(a) 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. Further 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 expire denote 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 property business. As the decisions was opposed by investors and clear indication of merchandise 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 consort, the reality Bank announced on December 23, 2008 that Satyam has been barred from business with World Bank for eight years for providing Bank staff with unlawful 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 long-suffering followed by the resignation of three more independent directors on December 28 i.e. Vinod K Dham (famously known as have 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 chairman of Satyam. A week after Satyam beginner B Ramalinga Raju s scandalous confession, Satyams auditors determine 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 aggravate within hours of the outburst of the incident and further deteriorated after Ramalinga Rajus confession Source http//akpinsight-ijcbs.webs.com5 execution of strategic decisionOn 30th Sep 2008, Satyam reported that it had exchange reserves 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 dec lared a revenue of 7.37Bn and net profit of 370 mn. On December 16th 2008 Satyam board approved acquisition of Maytas. 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 blossom forth 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 finale value December 16th and open offer made at 525 rs from the existing Maytas infra shareholders. afterward 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 current vertical of core business. Announcement however trigger negative reaction from industry, investors and stock markets. Satyams stock got sinful bea ting on December 16.The ADR fell from 12.55 to 5.70 after this announcement . On Bombay Stock exchange the stock fell from 226 to 158 rs. It went down further to 134 on December 24th 2008. The decision attracted lot of lit crit that promoters who has only 8.74% equity stake in the company were being allowed by the board to transfer a considerable amount of money 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 obligation 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 informed to investors in advance. Investors called this process as act of misuse of Satyam pecuniary resource 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 addicted 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 Is undercoat Based Upaid system and Raju and Satyam CFO. There are three cases respite 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 brawl 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 alter 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 asked 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 behavior 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 s elf-interests ahead of companys interests.6.2 A case of insider tradingBoth central and state investigation agencies and also audit firms revealed and open 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 misguided 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 dropp ed 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 the 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 downplay 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 Properties, and tour the share market reacted very strongly 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 oversight 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 scent wrong. Stakeholders place high expectations on them but the Satyams case reveals such expectations are misplaced. Six of the nine directors on Satyams Board we re independent directors including US academician Mangalam Srinivasan (the independent director since 1991), Vinod K. Dham (famously 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 qualification 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 performed 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 tha t such eminent and experienced personalities could not discover the well-planned massive fraud and manipulations.6.6 Questionable Role of Audit Firm/CommitteeThe true role of audit committee in prcis is to ensure 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 10 years).6.7 Suspicious Role of Rating AgenciesCredit rating agencies have been consistently incriminate of their lax attitude in assessing issuers and giving 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 7th largest corporation declared bankruptcy when it was rated investment grade by all the credit rating agencies even quartette 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 applications programme in their coverage 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 approve 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 massive 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 Waterhouse, 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 instance 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.