are independent directors watchdogs for good corporate governance?
TRANSCRIPT
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Are Independent Directors
watchdogs for good Corporate
Governance?
Submitted by:
Arjun Yadav (2013PGPM009)
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Index
1. Introduction... 3
2. Basic Concepts.. 42.1 Corporate Governance. 4
2.1.1 Principles of Corporate Governance.. 4
2.1.2 Need of Corporate Governance. 5
2.2 Board Size.. 6
2.3 Independent Directors.. 6
2.3.1 Definition of Independence 7
2.4 Role of Independent Directors in Corporate Governance 8
2.4.1 Challenges faced by Independent Directors in Corporate Governance. 8
3. Implementation of the Existing System. 9
3.1 Provisions in the Current Law. 9
3.2 Selection of Independent directors 10
4. Alternative systems prevailing in other countries. 12
4.1 Corporate Governance in the U.S 12
4.2 Corporate Governance in the U.K 15
4.3 Corporate Governance in Germany 17
5. Data Analysis and Interpretation 18
5.1 Ensuring the Independence of Judgment.. 18
5.2 Corporate Governance Failures 18
5.2.1 Enron.. 18
5.2.2 Satyam 20
5.2.3 WorldCom 22
6. Conclusion .. 25
6.1 Need of Independent Directors25
7. Bibliography . 26
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1. Introduction
At the core of corporate governance lies the board of directors. A joint-stock company is owned
by the shareholders, who appoint a board of directors to supervise and direct the management
of the company and ensure that the board does all that is necessary by legal and ethical means
to make the business grow to maximize long-term corporate value.
The most important point to be noted is that the board members are appointed by the
shareholders and other key stakeholders, and are accountable to them. In other words, the
directors are fiduciaries of shareholders, not of the management. This doesnt implythat the
board must have an adversarial relationship with the CEO and top management. In fact, most
successful boards have remarkable collegiality and, more often than not, agree to most
managerial initiatives. However, in instances where the objectives of management differ from
those of the wide body of shareholders, the non-executive directors on the board must be able
to speak up in the interest of the ultimate owners and discharge their fiduciary oversight
functions. This is the reason why independence has become such a critical issue in
determining the composition of any board.
With global competition getting more intense than ever, it would be very useful for boards to
have independent directors who can comment and contribute independently on a companys
business strategies, as well as on its strengths, weaknesses, opportunities and threats.
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2. Basic Concepts
2.1 Corporate Governance
Corporate governance can simply be described as a process by which directors control and
direct the management of a company to achieve the best returns for its owners.
2.1.1 Principles of Corporate Governance
The ICAEW in its latest paper suggests five underlying principles:
Leadership: A company should be headed by an effective board. The Board should alignits interests to that of the company in order to meet its business purpose in both the
short and long term.
Capability: The Board should have an appropriate mix of skills, experience andindependence to allow its members to effectively undertake their duties and
responsibilities.
Accountability: The Board should communicate to the companys shareholders andother stakeholders, at regular intervals, a fair, balanced and understandable assessment
of how the company is achieving its business purpose and meeting its other
responsibilities.
Sustainability: The Board should guide the business to create value and allocate it fairlyand sustainably to reinvestment and distributions to stakeholders, including
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shareholders, directors, employees and customers.
Integrity: The Board should lead the company to conduct its business in a fair andtransparent manner that can withstand scrutiny by stakeholders.
2.1.2 Need of Corporate Governance
Over the last decade there has been a realized importance of corporate governance among the
corporations and stakeholders. Some key factors that led up to this are:
The subject of corporate governance got in the limelight after a string of collapses ofhigh profile companies like Enron, WorldCom and Satyam. The government realized that
these companies are large and have public funds invested in them in huge amounts.
Capital markets are now getting closely integrated. Now there are virtually noconstraints on either foreign equity funds investing in India or in Indian companies
listing in the US or elsewhere. This is a boon for a lot of companies, it also brings in some
vulnerabilities.
Global agencies such as Standard & Poor have already begun to rate companiesaccording to corporate governance standards. Domestic rating agencies like CRISIL and
ICRA have also got into this act. It is, therefore, both meaningful and strategically
important for corporations to focus on corporate governance definition and raise the
bar.
This made the role of independent directors more important than ever. Keeping that in mind,
The Companies Act, 2013 has made some provisions which deal with the term independent
director.
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2.2 Board Size
The number of members in the board is the board size. The relationship between the size of
board and it effectiveness follows an inverted U curve. As the number of board members are
added initially, more ideas and knowledge flows and its effectiveness is enhanced till a
threshold point after which the size becomes a problem. Problems of coordination and conflict
arise and the effectiveness starts to decrease.
Relationship between effectiveness and board size
2.3 Independent Directors
An independent director of a company is a non-executive director who:
Apart from receiving directors remuneration, does not have any material pecuniaryrelationships or transactions with the company, its promoters, its senior management or
its holding company, its subsidiaries and associated companies.
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Is not related to promoters or management at the board level, or one level below theboard (spouse and dependent, parents, children or siblings).
Has not been an executive of the company in the last three years.
Is not a partner or an executive of the statutory auditing firm and the internal audit firmthat is associated with the company, and has not been a partner or an executive of any
such firm for the last three years. This will also apply to legal firm(s) and consulting
firm(s) that have a material association with the entity.
Is not a significant supplier, vendor or customer of the company. Is not a substantial shareholder of the company, i.e. owning 2 per cent or more of the
block of voting shares.
Has not been a director, independent or otherwise, of the company for more than threeterms of three years each (not exceeding nine years in any case).
2.3.1 Definition of Independence
To rephrase Bertolt Brecht, independence is a bit like communism: very easy to understand,
very hard to achieve. An independent director is one who should be able to exercise his or her
reasoned judgment without being unduly influenced by pressures either from management or
any dominant shareholder or stakeholder. An independent director, also known as an outside
director, is a member of the board of directors who doesnt own stake in the company. An
independent director cannot have any material relationship with the company and its related
persons, except sitting fees. As of 2004, a majority of the minimum seven directors of public
companies having a share capital in excess of Rs 5 Crore should be independent.
The word Independent Director was first used in Clause 49 under the heading Corporate
Governance. Since then there have been many changes under the Companies Act including
sections that talk about the requirement of Independent Director. The only difference between
a non-executive and a non-executive independent director is the latter is forbidden to have any
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pecuniary relationship with the company apart from receiving a sitting fee which has been
raised to Rs. 20,000/-.
2.4 Role of Independent Directors in Corporate Governance
Provide input and support to the Lead Independent Director on: Selection of committee chairs and membership on Board committees. Establishment of the agendas for the Nominating and Corporate Governance
Committee meetings.
Compensation philosophy for the Board and candidates for Board membership. Be accountable to and provide leadership for all issues of corporate governance which
should come to the attention of the Board and the Nominating and Corporate
Governance Committee.
2.4.1 Challenges faced by Independent Directors in Corporate Governance
Asymmetry of Information:The management of the company including promoters hasfar more information and knowledge regarding the affairs of a company and more
resources at their disposal compared to independent directors. This poses as a challenge
to understand what the best is for the company.
Vested Interests of Promoters: The management also has more financial stake indecisions and, therefore, has a major tendency to protect their interests. This makes it
very difficult for the voice of an outside director to be heard fairly.
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3. Implementation of the Existing System
In India there is a problem about the training of directors. A professional might be able to give
excellent corporate advice and guide a company in ways that maximise long-term shareholder
value but he or she might not be aware of the nitty-gritty of the rights, responsibilities, duties
and liabilities of a legally recognised fiduciary. Barring corporate lawyers, chartered accountants
and company secretaries, these technical aspects are not obvious to some of the best qualified
directors. Fully understanding such issues requires specialised training.
A lot of debate has been going on the subject of Independent Directors in the past few years.
While some say that an independent judgment is vital for efficient governance of an
organization, others have shown open criticism towards it.
3.1 Provisions in the Current Law
The new Companies Act, 2013 has several additional provisions regarding independent
directors:
Section 134(3)(d)deals with a statement on declaration of status of independentdirectors which will be attached with Directors Report of the Company.
Section 135(1)deals with constitution of Corporate Social Responsibility Committee inwhich one member should be an independent director.
Section 149deals with appointment and qualifications of independent directors.
Section 150deals with manner of selection of Independent directors and maintenanceof data bank of independent director.
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Section 152deals with total strength of directors in which independent director will notincluded in that total number of directors of the company.
Section 161says that no person shall be appointed as an alternate director for anindependent director unless he is qualified to be an independent director under the
provision of this Act.
Section 173(3)talks about Board Meeting at shorter notice in which at least oneIndependent director should be present.
Section 177talks about Audit Committee of the Company in which minimum number ofIndependent Directors will be three.
Section 197covers the different type of fee given to Independent Directors.
Schedule IVdeal with Code for Independent Directors
3.2 Selection of Independent directors
A difficult task is to select independent directors in the board of a company. There are
numerous criteria that govern the selection procedure:
In the private sector, one has to be well known and trusted by the promoters to beinvited to join a board as an independent director.
In public sector companies, where government is the promoter, these appointments arenot made by the chairman but by the minister in charge of the PSU.
Another criterion for selection of independent directors is their skills which vary acrosscorporations as well as with time. However, international experience suggests that all
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boards benefit from a few specialized skills. One of these is financial expertise. This
implies that they should have sufficient skills and experience to carefully read income
statements, cash flow statements, balance sheets, notes on accounts, and be able to
convene meaningful Audit Committee proceedings.
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4. Alternative systems prevailing in other countries
Companies in different countries operate in different social, legal and economic environments.
As a result, each country has developed its own corporate governance system to serve its
business operations in the best way possible. As the globalization of business speeds up, it is
unknown whether there exists a unanimous corporate governance system for all countries. The
following section compares the corporate governance factors in the United States of America,
United Kingdomand Germany. The three countries were selected because they adopt different
corporate governance models. Their corporate governance component factors can be classified
into three groups: those related to top management organization, the board as whole and
individual board members.
The reason for choosing German share companies and US listed corporations is that they each
adopt very different board models. While the Germans follow the one-tier model assigns the
combined monitoring and executive functions duties to one board. On the other hand, U.S
follows the two-tier model which that allows companies to assign these functions to two
independent boards: the supervisory and the management boards. These two board models
are typical corporate governance structures for most listed corporations in the world. In France,
companies are allowed to choose between any of the two models. Switzerland share
companies are not limited to any of the above two models and are free to choose any model of
their choice.
4.1 Corporate Governance in the U.S
The shareholder-centered model used in America combines features from both the shareholder
and stakeholder models, defined by a less clear separation between dispersed ownership and
managerial control. It includes dispersed ownership, strong legal protection for shareholders
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and indifference to other stakeholders. This hybrid model allows stakeholders to have more
influence over the operation of the company.
Companies listed on the NYSE must comply with the Listed Company Manual, which requires
listed companies to have a majority of independent directors.
The tests for independence are as follows:
No director qualifies as independent without the affirmation of the board of directorswhich determines that the director has no material relationship with the listed company
(directly or as a partner, shareholder or officer of an organization that has a relationship
with the company). Companies must disclose the nature of directorship and inform the
basis of that determination.
The director is, or has been within the last three years, an employee of the listedcompany, or an immediate family member is, or has been within the last three years, an
executive officer of the listed company.
The director has received, or has an immediate family member who has received, duringany twelve-month period within the last three years, more than $100,000 in direct
compensation from the listed company, other than director and committee fees and
pension or other forms of deferred compensation for prior service.
The director or an immediate family member is a current partner of a firm that is thecompanys internal or external auditor.
The director is a current employee of such a firm.
The director has an immediate family member who is a current employee of such a firm.
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The director or an immediate family member was within the last three years (but is nolonger) a partner or employee of such a firm and personally worked on the listed
companys audit committee within that time.
The director or an immediate family member is, or has been within the past three years,employed as an executive officer of another company where any of the listed
companys recent executive officers at the same time serves or served on that
companys compensation committee.
The director is a current employee, or an immediate family member is a currentexecutive officer, of a company that has made payments to, or received amounts from,the listed company.
The companies comparatively have the smallest board size but not necessarily the most
effective one. The boards have the most number of meetings as they have to monitor both
monitoring and executive functions.
Most companies of the US have already had some form of independent board leadership for a
while now and this practice has continued to grow. Small-cap companies experienced thegreatest growth in independent board leadership, and show a preference for independent
board chairs. Mid- and large-cap companies tend to favor lead directors as they have more at
stake and tend to be more conservative. The following tables present data from 2007 and 2012
to give a comparative analysis of the growth.
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Source: Ernst & Young Corporate Governance Report May 2013
4.2 Corporate Governance in the U.K
The UK has developed a market-based approach that enables the board to retain flexibility in
the way in which it organizes itself and exercises its responsibilities, while ensuring that it is
properly accountable to its shareholders.
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This is done primarily through the UK Corporate Governance Code which is maintained by the
FRC. The Code operates on the basis of comply or explain. It identifies good governance
practices relating to, for example, the board and its committees and risk management and
internal control, but companies can choose to adopt a different approach if that is more
appropriate to their circumstances. Where they do so, however, they are required to explain
the reason to their shareholders who must decide whether they are content with the approach
that has been taken.
This comply or explain approach enablesjudgments about, for example, the composition and
performance of the board to be made on a case by case basis. It is supported by companies,
investors and regulators in the UK, and has increasingly been adopted as a model in other
markets.
For the system to work effectively shareholders need to have appropriate and relevant
information to enable them to make a judgment on the governance practices of the companies
in which they invest. They also need the rights to enable them to influence the behaviour of the
board when they are not content, and the willingness to use them. Comply or explain
therefore needs to be underpinned by an appropriate regulatory framework.
Under UK law, shareholders have comparatively extensive voting rights, including the rights to
appoint and dismiss individual directors and, in certain circumstances, to call a general meeting
of the company. Certain requirements relating to general meetings, including the provision of
information to shareholders and arrangements for voting on resolutions, are also set out in law,
as are some requirements for information to be disclosed in the annual report and accounts.
These include requirements for a Business Review (in which the board sets out its assessment
of the companys future prospects) and a report on directors remuneration, on which
shareholders have an advisory vote.
There are also additional regulatory requirements for some specific sectors, such as financial
services.
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This framework is reinforced by the rules that must be followed by companies listed on the
London Stock Exchange. The rules provide further rights to shareholders (for example, by
requiring that major transactions are put to a vote), and require certain information to be
disclosed to the market. For companies with a Premium Listing, this includes the requirement
to provide a comply or explain statement in the annual report explaining how the company
has applied the UK Corporate Governance Code.
4.3 Corporate Governance in Germany
Corporate Governance in Germany is characterized by a number of unique features, chief
among them being the requirement under the German Stock Corporation Law (AktG) that
boards of directors are divided into two tiers: a management board (called the Vorstand) which
is solely responsible for the management of the company, and a supervisory board (called the
Aufsichtsrat), which is charged with overseeing the activity of the management board. German
boards of directors are also unique in that, under the German 'Co-determination Law',
supervisory board members of large companies (> 500 employees) are elected both by
shareholders and by company employees: the employees elect one third or half of the board
(depending on the size of the company). Neither shareholders nor employees elect members to
the management board; instead, these members are appointed by the supervisory board. The
German Corporate Governance Code (Codex) works on a 'comply or explain'-basis and aims at
making the German Corporate Governance system more transparent and understandable.
The companies have the largest board size. They have a higher probability to suffer from the
adverse affects of too large a board but a research study conducted by Leimkhler suggested
that the notion supervisory boards are in general inefficient as a consequence of their large size
isnt validated. German companies have the fewest board meetings. Since they follow a one-
tier model, they do not require meetings to be held as frequently as companies in the US.
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5. Data Analysis and Interpretation
5.1 Ensuring the Independence of Judgement
Defining independence is not sufficient to ensure independence of judgement. The choice of
directors and the skills that they bring to the board helps in ensuring independence of
judgement. Some factors that play an important are:
The conduct of board meetings.
The quality with which financial, strategic and operational information is supplied to theboard by the management.
Managements appreciationfor independent evaluation and criticism of performanceand strategies.
The actual role of the various committees of the board.
Willing of a company to pay for the experience and skill sets of professional,independent directors.
5.2 Corporate Governance Failures
5.2.1 Enron
Billions of dollars of market value erased. Thousands of jobs lost. Savings wiped out. A demise
as spectacular as Enrons has failure written all over it. And in somequarters, that failure is at
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least partially attributed to the complex derivatives transactions that Enron entered into
transactions that some believe may have been used to conceal or obscure the companys true
financial condition, to hide losses, and to bolster earnings. Yet a close analysis of the Enron
situation yields a different story, one that is unfortunately not likely to sell many newspapers or
provide much fodder on the floors of Congress. Put simply, the market worked.
This storywhich ISDA articulates in the following reportcenters on the powerful and
protective market forces that ultimately compelled the truth about Enrons financialcondition
and financial transactions to be exposed, and that enabled the derivatives business to function
smoothly in the event of Enrons collapse. As documented in thisreport (and using supporting
material as noted throughout the paper):
The Enron failure demonstrated a failure of corporate governance, in which internalcontrol mechanisms were short-circuited by conflicts of interest that enriched certain
managers at the expense of the shareholders. Although derivatives made appearances
in the course of the governance failures, they played no essential role.
Enrons actions appear to have been undertaken to mislead the market by creating theappearance of greater creditworthiness and financial stability than was in fact the case.
The market in the end exercised the ultimate sanction over the firm.
Even after Enron failed, the market for swaps and other derivatives worked as expectedand experienced no apparent disruption. There is no evidence that the market failed to
function in the Enron episode. On the contrary, the market did exactly what it is
supposed to do, which is to use reputation as a means of monitoring market
participants.
There is no evidence that existing regulation is inadequate to solve the problems thatdid occur. Had Enron complied with existing market practices, not to mention existing
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accounting and disclosure requirements, it could not have built the house of cards that
eventually led to its downfall.
Finally, it is likely that additional government regulation, by increasing moral hazard anddecreasing legal certainty, could have the unintended consequence of making future
failures and market instability more likely along with increasing the cost and decreasing
the availability of risk management tools like swaps.
In sum, ISDA articulates in this paper that the market imposes a substantial discipline on swaps
activity. ISDA asserts that these powerful forces of market discipline were in play as Enron
sought to establish itself as a major participant in energy and energy derivatives trading. As it
did so, Enron attempted to evade the discipline of the market and inflate its creditworthiness
through its well-documented failures in corporate governance, accounting and disclosure.
These attempts at deception, and the ultimate fate of Enron, are themselves confirmation of
the relevance and power of the discipline the market imposes on participants in swaps activity.
5.2.2 Satyam
On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he
committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of
corporate governance (Chakrabarti, 2008). The Satyam scam had been the example for
following poor CG practices. It had failed to show good relation with the shareholders and
employees. As Kahn (2009) stated, CG issue at Satyam arose because of non-fulfillment of
obligation of the company towards the various stakeholders. Of specific interest are the
following: distinguishing the roles of board and management; separation of the roles of the CEOand chairman; appointment to the board; directors and executive compensation; protection of
shareholders rights and their executives. In fact, shareholders never had the opportunity to
give their consent prior to the announcement of the Matyas deal and falsified documents with
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grossly inflated financialreports were delivered to them. Ultimately, shareholders were at a
loss and felt cheated. Surely, questions about managements credibility were raised, in addition
to the nonpayment of advance taxes to the government. Together, these issues raise questions
about Satyams financial health.
Lessons learnt from Satyam
The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed
corporate leader. As the fallout continues, and the effects were felt throughout the global
economy, the prevailing hope is that some good can come from the scandal in terms of lessons
learned (Behan, 2009). Here are some lessons learned from the Satyam Scandal:
Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventuallygrowing into $276 million white-elephant in the room. Indeed, a lot of fraud schemes
initially start out small, with the perpetrator thinking that small changes here and there
would not make a big difference, and is less likely to be detected. This sends a message
to a lot of companies: if your accounts are not balancing, or if something seems
inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across
a team of people makes it easier to detect irregularities or misappropriated funds.
Ruined reputations: Fraud does not just look bad on a company; it looks bad on thewhole industry and a country. Indias biggest corporate scandal in memory threatens
future foreign investment flows into Asias third-largest economy and casts a cloud over
growth in its once-booming outsourcing sector. The news sent Indian equity markets
into a tail-spin, with Bombays main benchmark index tumbling 7.3% and the Indian
rupee fell (IMF, 2010). Now, because of the Satyam scandal, Indian rivals will come
under greater scrutiny by the regulators, investors and customers.
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Corporate Governance needs to be stronger: The Satyam case is just another examplesupporting the need for stronger CG. All public-companies must be careful when
selecting executives and top-level managers. These are the people who set the tone for
the company: if there is corruption at the top, it is bound to trickle-down. Also, separate
the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid
situations like the one at Satyam.
The Satyam Computer Services scandal brought to light the importance of ethics and its
relevance to corporate culture. The fraud committed by the founders of Satyam is a testament
to the fact that the science of conduct is swayed in large by human greed, ambition, and
hunger for power, money, fame and glory. Scandals from Enron to the recent financial crisis
have time and time again proven that there is a need for good conduct based on strong ethics.
Not surprising, such frauds can happen, at any time, all over the world. Satyam fraud spurred
the government of India to tighten CG norms to prevent recurrence of similar frauds in the near
future. The government took prompt actions to protect the interest of the investors and
safeguard the credibility of India and the nations image across the world.
5.2.3 WorldCom
The WorldCom case has become a kind of poster child for corporate governance failures in this
new century. WorldCom, the worlds second largest telecommunications company, filed for
bankruptcy in the federal court in Manhattan in the summer of 2002, after the disclosure of
massive accounting irregularities. I was appointed as Examiner by the bankruptcy court in
August, 2002, filed my first interim report that November, a second interim report in June of
2003 and my final report earlier this year. My remarks tonight will, understandably, referenceonly the results of our completed investigations which have been made public. But even the
public story provides a genuine case study in the failure of corporate governance and suggests a
number of lessons in how to avoid its repetition.
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At the outset, I suspect you might logically ask, What is a bankruptcy examiner? What does a
bankruptcy examiner do? Put simply, I was appointed by Judge Arthur Gonzales in the
Bankruptcy Court in the Southern District of New York in Manhattan to carry out an
independent investigation into what happened in the WorldCom matter. My job was to
assure the judge that procedures and persons involved in any past wrongdoing were not carried
forward into the reorganized entity. We were also asked to identify potential causes of action
that the company might have against third persons responsible for losses to the company and
to make recommendations to aid in avoiding repetition elsewhere of the acts that caused the
downfall of WorldCom. We worked closely with the U.S. Department of Justice and state
prosecutors, although we had no criminal jurisdiction. We also worked with the SEC and other
regulators, although we had no regulatory responsibility. And we worked with representatives
of the creditors of the company and the Corporate Monitor appointed in connection with the
SEC proceedings to fully develop the facts. Our completed reports are now in the hands of the
public and the new management of WorldCom for their guidance.
What happened in the WorldCom case? Most of the deviations from proper corporate behavior
of which we took note resulted from the failure of Board of Directors to recognize, and to deal
effectively with, abuses reflecting what our reports identified as a culture of greed within the
corporations top management. Others resulted from an abject failure of responsible persons
within the company to fulfill their fiduciary obligations to shareholders. A third contributing
factor was a lack of transparency between senior management and the Companys board of
directors. In the final analysis, what we saw was a complete breakdown of the system of
corporate governance. The checks and balances designed to prevent wrongdoing and
irregularities simply failed to operate.
The actual fraud within WorldCom consisted of a number of so called topside adjustments to
accounting entries to prop up declining earnings. Mostly these consisted of improper draw-
downs of reserves accumulated from its acquisition program and other sources and improper
capitalization of costs which should have been expensed. It was, in short, a classic case of
cooking the books While WorldCom has not completed the restatement of its financials, the
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judge handling the SEC proceedings in New York reported that the company overstated its
income by approximately $11 billion, overstated its balance sheet by approximately $75 billion
and, as a result, caused losses in shareholder value of as much as $250 billion, a significant
amount of the latter, of course, in employee 401(k) retirement funds.
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6. Conclusion
Though there seems to be shortage of adequate independent directors, there are enough
capable people to play key fiduciary roles in boards of Group A, B1 and B2 companies which
together account for almost 95 per cent of market capitalization. Good independent directors
are not ubiquitous enough because they are not sought enough by companies, and because
they are not adequately compensated for their time. If the compensation problem is taken care
of, then it is feasible to attract better talent on boards, despite a more stringent definition of
independence.
6.1 Need of Independent Directors
The idea of Independent directors to act as watchdogs for corporate governancestems from the fact that they are independent from the management giving them the
ability to provide a fresh outlook into the decision making of a company. The role of
independent director, in part, is to act as a watchdog on the promoters and the
management of the company and protect the interests of minority shareholders.
Other closely held businesses may want independent directors who can offer financial,technical, and/or strategic advice to the operational officers of the company. The
independent directors here act as advisors to Executive Directors and the management.
Though the independent directors play an important role in corporate governance of a
company, they cannot be held completely liable for any sort of malignancy in a companys
overall governance.
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