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Flow of presentation

Definition Commonly Accepted Principles

Mechanisms of Corporate Governance in India

Corporate Governance Scandals

Resolving the flaws of Corporate Governance

Conclusion

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Corporate governance is the set

of processes, customs, policies, laws, and institutions affecting

the way a corporation (or company) is directed, administered or

controlled.

Corporate governance also includes the relationships amongst the

stakeholders involved and the goals for which the corporation is

governed.

Principal stakeholders being the

shareholders,

the board of directors,

executives,

employees,

customers,

creditors,

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Commonly Accepted Principles

Rights and equitable treatment of shareholders

Interests of other stakeholders

Role and responsibilities of the board

Integrity and ethical behavior

Disclosure and transparency

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Mechanisms of Corporate

Governance in India

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Companies Act

One of the biggest legislations with 658 sections and 14

schedules

The Act confers legal rights to shareholders to

Vote on every resolution placed before an annual general

meeting;

To elect directors who are responsible for specifying

objectives and laying down policies;

Determine remuneration of directors and the CEO;

Removal of directors and

Take active part in the annual general meetings.

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Securities law

The primary securities law : SEBI Act

A number of initiatives towards investor protection

One such initiative is to mandate information disclosureboth in prospectus and in annual accounts.

Nominees on companyboards Development banks hold large blocks of shares in

companies.

Being equity holders, these investors have their nominees inthe boards of companies. These nominees can effectivelyblock resolutions, which may be detrimental to theirinterests.

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Statutory audit Auditors are the conscious-keepers of shareholders, lenders and

others who have financial stakes in companies.

The auditing process ensures that financial statements are accurateand complete, thereby enhancing their reliability and usefulness formaking investment decisions.

Discipline of the capitalmarket

Capital market itself has considerable impact

Role the minority shareholders can play effectively . They can

refuse to subscribe to the capital of a company in the primarymarket and in the secondary market

can sell their shares, thus depressing the share prices. A

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Code of conduct

The mechanisms discussed till now are regulatory inapproach. They are mandated by law and violation of anyprovision invites penal action.

Legal rules alone cannot ensure good corporate governance.

What is needed is self-regulation on the part of directors,besides of course, the mandatory provisions

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CORPORATE GOVERNANCE

SCANDALS

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CORPORATE GOVERNANCEFAILURES

Corporate governance, in todays world, is more in theoretical

concepts rather than practical implications.

Critical factors in many corporate failures are:

Poorly designed rewards package

Including excessive use of share options (that distorted executive

behavior towards the short term)

The use of stock options, or rewards linked to short-term shareprice performance (led to Aggressive earnings management toachieve target share prices)

Trading did not deliver the earnings targets, aggressive or even

fraudulent accounting tended to occur. This was very apparent inthe cases of Ahold, Enron, WorldCom and Xerox .

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SCANDALS AT A GLANCE

THE COBBLERS SCAM SOHIN DAYACASE

Sohin Daya(son of a former Sheriff of Mumbai) of Dawood Shoes, Rafique Tejani of

Metro Shoes, and Kishore Signapurkar of Milano Shoes were arrested for creatingseveral leather co-operative societies which did not exist.

They availed loans of crores of rupees on behalf of these fictitious societies

The scam was exposed in 1995.

Officials of the Maharashtra State Finance Corporation, Citibank, Bank of Oman, DenaDevelopment Credit Bank, Saraswat Co-operative Bank, and Bank of Bahrain andKuwait were also charge sheeted.

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SATYAM ACCOUNTINGSCANDAL

7 January 2009 : Scandal publicly announced ; whenChairman Ramalinga Raju confessed that Satyam's accounts had beenfalsified. He was charged with several offences, including criminal

conspiracy, breach of trust, and forgery.

10 January 2009: The Company Law Board decided to bar the currentboard of Satyam from functioning and appoint 10 nominal directors.

Vadlamani Srinivas, then-CFO, was arrested and kept in judicial

custody by CID 11 January 2009 : Government nominated noted banker Deepak

Parekh, former NASSCOM chief Kiran Karnik and former SEBImember C Achuthan to Satyam's board.

14 January 2009 : Price Waterhouse announced the audit reports as

"inaccurate and unreliable

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22 January 2009: Declared in court that the actual number ofemployees is only 40,000 and not 53,000 as reported earlier . Mr.Raju had been allegedly withdrawing INR 20 crore rupees everymonth for paying these 13,000 non-existent employees.

Many renowned firms like BOA, Credit Suisse terminated itsengagement with Satyam.

Golden Peacock Award for Corporate Governance under RiskManagement and Compliance Issues, awarded in 2008, wasstripped from Satyam

This has been analyzed as a problem relating to India's caste-based,family-owned corporate environment.

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POISONING IN KODAIKANAL, Tamilnadu

In 1984 , Ponds set up a thermometer factory in Kodaikanal, whichwas acquired by HUL in 1997

In 2001 Greenpeace and Palani Hills Conservation Council (PHCC)uncovered and brought into the public domain the severity of HULsacts of toxic dumping.

Mercury is a neurotoxin and it can damage the brain, heart, kidney,and liver. The factory in Kodaikanal exposed its workers to thehazardous mercury and released tons of mercury waste into itssurroundings.

Workers of the thermometer factory were not warned of the

hazardous nature of mercury, nor were they given any protective gear.At least 19 workers from the factory died.

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Faced with the inability to work and massive medical expenses, severalworkers and their families were confronting destitution. The companyrefused to come to the aid of those poisoned by it, and delayed clean up tointernational standards.

On 25 February 2008, the Office Bearers of All India Council of UnileverUnions, on being informed about the present pathetic condition of the ex-

workers and their families of Kodaikanal factory decided to support thestruggle of Kodaikanal workers & their families and passed a Resolution towork jointly with the Ex-Workers of Kodaikanal for getting them Justiceand compensation to the mercury affected workers & their families from theHindustan Unilever Management.

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STONE QUARRYING COMPANIES ANDSILICOSIS IN LAL KUAN

Lal Kuan area in New Delhi had nearly 300 stone quarrying companies, employingthousands of migrant workers from rural areas of Rajasthan, UP , Bihar, and MP.Most workers belonged to SC, ST and OBC categories.

It was discovered that workers suffer from a high incidence of respiratory illnessessuch as silicosis, tuberculosis and silico-tuberculosis. Many had died premature

deaths and hundreds were confronting severe health problems, inability to work andhigh medical expenses. This was due to high exposure to silica

The workers were not informed about the hazards of silica exposure, nor were theygiven any protective gear or health care facilities to monitor their health. Health careprofessionals misdiagnosed the illness for years both out of ignorance and alsobecause an acknowledgement of the disease would entail fixing responsibility of

safety standards on the stone quarrying companies and the Delhi GovernmentsLabour Department

In 1992 ,by a Supreme Court order in response to a public interest litigation filed bya lawyer M. C. Mehta, these companies were shut down.

INTERNATIONAL SCANDALS AT

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INTERNATIONAL SCANDALS ATA GLANCE

2008 Siemensscandal It was a corruption and bribery scandal that hit Greece over deals

between Siemens AG and Greek government officials during the 2004 SummerOlympic Games in Athens ,regarding security systems and purchasesby OTE in the 1990s.

Charges have not been bought against any specific individual, as under Greeklaw charges can be filled against "any responsible person".So far, no

wrongdoing has been proved,

The scandal has created a serious change in the attitudes of the Greek public,most notably dissatisfaction with both main political parties in Greece, NeaDimokratia and PASOK, and the alleged scandal may have been responsiblefor a shift of the electorate towards "third parties" such as SYRIZA and LAOS.

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Bribes may have been up to 100 million Euro and were allegedlygiven in order to win state contracts.

Contrary to the scandal, Siemens continues to enjoy the confidence ofthe Greek consumers to its products and there are no data that indicateany shift in the consuming preferences

A Greek prosecutor, after 2 years of investigations, filled charges in2008 for money laundering and bribery.

Tasos Mantelis, Minister for Transport and Communications in 1998admitted in 2010, that the sum of 200,000 German marks wasdeposited in 1998 in a Swiss bank account from Siemens during hisadministration, allegedly for funding his election campaign. A furtherdeposit of 250,000 German marks was made into the same bankaccount in 2000 which he claims is from an unknown source.

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ENRON ACCOUNTING SCANDAL

Revealed in October 2001, this scandal eventually led to the bankruptcy of

the Enron Corporation and the dissolution of Arthur Andersen, which was one

of the five largest audit and accountancy partnerships in the world.

In addition to being the largest bankruptcy reorganization in American history

at that time, Enron was attributed as the biggest audit failure.

Formed in 1985 by Kenneth Lay after merging Houston Natural

Gas and InterNorth.

Jeffrey Skilling was hired, he developed a staff of executives that, through the

use of accounting loopholes, special purpose entities, and poor financial

reporting, were able to hide billions in debt from failed deals and projects.

Andrew Fastow ,CFO and other executives not only misled Enron's board of

directors and audit committee on high-risk accounting practices, but also

pressured Andersen to ignore the issues.

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Shareholders lost nearly $11 billion and Enron's stock price, which hit a highof US$90 per share in mid-2000, plummeted to less than $1 by the end of November2001. On December 2, 2001, Enron filed for bankruptcy.

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

Enron's auditor, Arthur Andersen, was found guilty in a United States District Court,but by the time the ruling was overturned at the U.S. Supreme Court, the firm had lostthe majority of its customers and had shut down.

Employees and shareholders received limited returns in lawsuits, despite losingbillions in pensions and stock prices.

As a consequence of the scandal, new regulations and legislation were enacted toexpand the accuracy of financial reporting for public companies. One piece oflegislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering,

or fabricating records in federal investigations or for attempting to defraudshareholders. The act also increased the accountability of auditing firms to remainunbiased and independent of their clients.

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THE FLAWS OF CORPORATEGOVERNANCE

Segregation of duties - Chairman andCEO

Audit Committee

Independence and conflicts ofinterest

Flow of information

Too many directorships

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Conclusion

In our complex corporate environment, failure to share information isthe basic problem.

The concept of corporate governance implies consistent and effectivelaws, methods, and metrics for governing our nations publiccompanies. The difficulty remains in the implementation of the

principles of corporate governance ,thus posing it just as a toy in thehands of corporate honchos

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Any Questions?

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