ETHICAL DECISION

MAKING

SESSION 11
CORPORATE GOVERNANCE
AGENDA
• Case- Fraud at Worldcom
• Corporate governance
• Case: Shareholder rights at Cracker Barrel
• Corporate accountability
• Corporate compliance
• Cases:
• Enron
• Satyam Computers

2
 CASE- FRAUD AT
WORLDCOM
• Worldcom was once the second largest long distance
telecommunication service provider in the US
• The company filed for bankruptcy in July 2002
• A company which was once worth more than $180 B became a pauper
• There was a $41 B debt mainly because of the buying spree that
propelled its growth culminating in the purchase of MCI then the
second largest long distance carrier
• The acquisition enabled the stocks of Worldcom to become the darling
of Wall street
• The company revealed that it reversed $3.8 B that it had improperly
booked as revenue
• Bernie Ebbers who was a former milkman, bartender, high school
basket ball coach and owner of 13 budget hotels and one of the
founders of Worldcom was made CEO to manage the struggling
company in 1995

3
WORLDCOM…
• Ebbers was known as a ‘hands off manager” with little concern
for integrating the acquired companies
• The result was that the customers and employees of the
acquired companies remained segmented
• The companies culture was that the employees should not
question their superiors
• He was recalled saying that to write a code of ethics was “a
colossal waste of time”
• In 2002 the US department of justice scuttled Worldcom’s bid
to acquire Sprint and the revenue needed to meet analyst’s
expectation had to be found elsewhere.
• At that time, it was reported that, “Ebbers appeared to lack a
strategic sense of direction” and the company began to drift

4
 WORLDCOM…
• This is when the CFO, Scott Sullivan came up with a plan
• He ordered the Controller David Myers and Accounting Director Buford
Yates to divert funds that had been set aside as per accounting rules
(GAAP) to pay for line expenses
• The task of making the accounting entry fell on Betty Vinson who had a
reputation for diligence and hard work
• Betty was shocked but made the entry reluctantly
• Consequently Betty and another colleague announced their plan to
resign but stayed back when assurances were given by senior officials
including Ebbers that they will never be asked to do this again
• When things got tough in 2001, Sullivan came up with another plan- to
record 771 million dollars of line expenses as capital investment- the
logic was that this would enable the company to grow and Betty was
ordered to make this accounting entry

5
WORLDCOM
• Following this, Betty started looking out for a job
• She was asked to repeat this procedure a few more times
• By then Sullivan was convinced that this wrong practice will have
to continue through 2002 if they were to meet analyst’s
expectations
• Betty and another colleague then announced that they would no
longer make such improper entries
• SEC began to ask for documents from Worldcom and Cynthia
Cooper, head of internal audit also initiated an inquiry
• The board dismissed Ebbers in April 2002 for landing the
company in such a mess
• The affected employees like Betty and Yates hired lawyers to
defend them

6
WORLDCOM…
• In June 2002 SEC brought civil charges against Worldcom
and brought criminal proceedings against Ebbers, Sullivan,
Yates and Betty
• All were found guilty
• Ebbers got 25 years
• Sullivan got 5 years
• Betty and Yates got one year- the US attorney who
prosecuted said that, “following orders is not an excuse for
breaking the law”. We saw this in the loyal agent
argument. Loyalty does not require abetment of crime
• This case brought into focus Corporate Governance,
accountability of the management team and compliance
requirements

7
CORPORATE
GOVERNANCE
• Corporate governance is the system of rules, practices and
processes by which a company is directed and controlled.
• Corporate governance essentially involves balancing the
interests of a company's many stakeholders such as
shareholders, management, customers, suppliers, financiers,
government and the community.
• Since corporate governance also provides the framework for
attaining a company's objectives, it encompasses practically
every sphere of management,
• from action plans and internal controls to performance
measurement and corporate disclosure
• The board of directors is pivotal in governance, and it can
have major ramifications for equity valuation.

8
 BOARD OF DIRECTORS
• The board of directors is the primary direct stakeholder influencing
corporate governance.
• Directors are elected by shareholders or appointed by other board
members, and they represent shareholders of the company.
• The board is tasked with making important decisions, such as corporate
officer appointments, executive compensation and dividend policy.
• In some instances, board obligations stretch beyond financial
optimization, when shareholder resolutions call for certain social or
environmental concerns to be prioritized.
• Boards are often comprised of inside and independent members.
• Insiders are major shareholders, founders and executives.
• Independent directors do not share the ties of the insiders, but they
are chosen because of their experience managing or directing other
large companies.
• Independents are considered helpful for governance, because they
dilute the concentration of power and help align shareholder interest
with those of the insiders. Also balance conflicts of interest

9
 GOOD AND BAD
GOVERNANCE
• Good corporate governance
• Creates a transparent set of rules and controls in which
shareholders, directors and officers have aligned incentives.
• For many shareholders, it is not enough for a company to merely
be profitable; it also needs to demonstrate good corporate
citizenship through environmental awareness, ethical
behavior and sound corporate governance practices.
• Bad corporate governance
• Can cast doubt on a company's reliability, integrity or obligation
to shareholders.
• Tolerance or support of illegal activities can create scandals like
the one that rocked Volkswagen AG in 2015.
• Companies that do not cooperate sufficiently with auditors or do
not select auditors with the appropriate competency and integrity

10
can publish spurious or noncompliant financial results
 CASE- SHAREHOLDER RIGHTS
AT CRACKER BARREL
• Cracker Barrel Old Country Stores, Inc., operated a chain of
restaurants and gift shops mostly in South and Midwest of the US
• In 1991, many shareholders along with employees and members of
public were outraged by the dismissal of 11 employees by the
company for their sexual orientation
• This was following the new policy of the company to no longer employ
individuals whose sexual preference “fail to demonstrate normal
sexual values” or whose lifestyle was “contrary to traditional American
values”.
• The fired employees had no protection as the discrimination laws do
not cover sexual orientation

11
CRACKER BARREL…
• The shareholders thought they could bring about a
change as they were “owners” of Cracker Barrel.
• The New York City Employees’ Retirement Systems
(NYCERS) which held 121,000 shares worth around $4.5 M
proposed a resolution to be voted in the 1992 annual meeting.
They wanted “sexual orientation” to be added to the
company’s equal employment policy.
• The legal basis for the NYCER’s action was a rule of the
Securities Act, which permits shareholders to propose
resolutions to be included in the company’s proxy material to
vote in the general meeting.

12
 CRACKER BARREL…
• The proposal was disallowed by the company as a rule in the Act
permits a company to refuse to submit a proposed resolution under
several conditions, one of them being that the resolution deals with
the “ordinary business operations” of the company.
• As required, this was notified to the SEC and it agreed with the
company’s decision
• The SEC’s position was that it can be included only if it involves, “any
substantial policy or other considerations”, and not “business
matters of mundane nature”
• The SEC’s ruling meant that shareholders had no right to vote on any
resolution dealing with a company’s employment policies even when
the shareholders believed that the company’s policy on sexual
orientation is morally objectionable

13
 CRACKER BARREL…
• The question then is if the shareholders are owners of the company, do
they not have the right to force a vote and make their voice heard?
• Some people considered this as a matter of shareholder democracy
• The contra argument is that the shareholders have elected the board
of directors who in turn have appointed the management team. If
the shareholders disapprove of the way in which the company is run,
they must attempt to vote them out. Shareholders should leave it to
the top management to run the company and not interfere in the
day- to- day operations of the company
• The matter of shareholders having a greater voice in the nomination of
directors is being considered by SEC
• In 1998 the SEC reversed their Cracker Barrel ruling saying that
whether it is mundane or otherwise needs to examined on a case- to-
case basis and it observed, “the relative importance of certain social
issues related to employment as a topic for widespread debate”

14
 SHAREHOLDER
PRIMACY
Shareholder primacy is a shareholder-centric form of corporate
governance that focuses on maximizing the value
of shareholders before considering the interests of other corporate
stakeholders, such as the society, community, consumers, and
employees.
The debate between a shareholder approach and a stakeholder
approach has been going on for a long time.
Advocates of the shareholder approach stress that corporations should
focus on shareholder wealth maximization
The proponents of the stakeholder approach highlight the importance of
corporations such as employment of resources, higher quality products
for consumers, and social responsibility improvements within the
general community.

15
CORPORATE
ACCOUNTABILITY
The American system has three components
1. Financial reporting
2. Corporate management
3. Criminal law

16
 FINANCIAL
REPORTING
• The law requires that public companies prepare financial statements
present a fair and accurate picture of the financial condition of
the firm
• These statements must be audited and attested by a certified CA
firm
• Accounting must be done in accordance with standards laid down like
the GAAP in the US and Indian Accounting Standard (Ind- AS)
• In addition controls like Internal Audit are required to act as
watchdogs
• Auditors/ Accountants being human are subject to ethical lapses
• If accounting and auditing are properly done, then fraud and
wrong doing can be prevented
• Important requirements for auditors are confidentiality and conflict
of interest

17
 CORPORATE MANAGEMENT- ROLE
OF BOARD IN INGERSOLL RAND
The Board’s role is to oversee the management and governance of the Company and to monitor
senior management’s performance.
Among the Board’s core responsibilities are to:
• Select individuals for Board membership and evaluate the performance of the Board, Board
committees and individual directors.
• Select, monitor, evaluate and compensate senior management.
• Assure that management succession planning is adequate.
• Review and approve significant corporate actions.
• Review and monitor implementation of management’s strategic plans.
• Review and approve the Company’s annual operating plans and budgets.
• Monitor corporate performance and evaluate results compared to the strategic plans and other long-
range goals.
• Review the Company’s financial controls and reporting systems.
• Review and approve the Company’s financial statements and financial reporting.
• Review the Company’s ethical standards and legal compliance programs and procedures.
• Oversee the Company’s management of enterprise risk.
• Monitor relations with shareholders, employees, and the communities in which the Company
operates.

18
CORPORATE MANAGEMENT-
ROLE OF CEO
The CEO is appointed by the board and reports to the board or the
Chairman of the board. CEO is a “hands- on” person
There is no hard and fast role definition but by and large, the CEO is
responsible for:
• Leading the development and execution of the Company’s long
term strategy with a view to creating shareholder value.
• Responsible for all day-to-day management decisions and for
implementing the Company’s long and short term plans.
• Act as a direct liaison between the Board and management of the
Company and communicates to the Board on behalf of
management.
• The CEO also communicates on behalf of the Company to
shareholders, employees, Government authorities, other
stakeholders and the public.

19
 WHY CEO SHOULD NOT
BE THE CHAIRMAN
1. Clearly distinguishes between the roles of the board and management.
2. Eliminates conflicts in the areas of
1. Performance Evaluation
2. Executive Compensation
3. Corporate Governance, and
4. Independence of audit committee
3. Gives one director clear authority to speak on behalf of the board.
4. Allows the CEO to focus completely on operations, and
organizational issues in strategy execution.
5. Conducts executive sessions that allow for open and candid
conversations between the independent directors and the CEO.
6. Helps in a crisis situation by coordinating communications between
the board and management, as well as communications between the
company and external groups, such as investors or members of the
media.

20
THE SARBANES-
OXLEY ACT
Enron, Arthur Andersen, Worldcom, and Tyco. When corporate
names become synonymous with scandal and greed, public
confidence wavers. The Sarbanes-Oxley Act was signed into law on
July 30, 2002 in response to corporate scandals.
Sarbanes-Oxley has been called by many the most far-reaching
U.S. securities legislation in years.
Now, all companies required to file periodic reports with the
Securities and Exchange Commission (SEC) have new duties for
reporting and corporate obligation. Non-compliance comes with
significant penalties.
The six main areas of the Act: (1.) oversight by the board (2.)
increased auditor independence (3.) greater financial disclosures (4.)
conflict of interest disclosures for analysts (5.) corporate and criminal
fraud accountability and (6.) sharpened responsibilities for attorneys.

21
 THE ENRON CASE
• Kenneth Lay was the founder of Enron and was also responsible for its
downfall. He was both creator and destroyer
• He was CEO and Chairman from 1985 till his resignation in 2003 except
for a few months in 2000 when Jeff Skilling was CEO and he was
Chairman
• In 2001 the scandal broke out and since then Enron has been
synonymous with corporate abuse and accounting fraud
• Lay was engaged in defrauding by falsifying financial reports and
misleading public about the company’s performance and financial health.
He also lied to Wall Street about the company’s well being
• Enron confessed to inflating income by $586 million
• The aggressive “mark-to-market” (income from anticipated deals but not
yet realized) accounting practice allowed Enron to build castles in the air.
• However, Lay himself made millions by selling his Enron stock just before
the scandal broke out

22
 ENRON…
• Plenty of law suits were filed by employees and creditors- the credit
rating companies mentioned that Enron was unable to meet its debts
• Stock prices plunged from a high of $90 in 2000 to a mere 61 cents in
2001
• Financial bail out was not possible and the company filed for
bankruptcy and was closed down in Dec 2001
• Between Jan 2001 and Nov 2001, Lay sold 918,104 shares back to
the company in multiple transactions totaling to over $21 M at prices
he knew did not reflect the true financial condition of Enron
• Even employees and shareholders of the company did not know
about Lay selling stocks back to the company till Feb 2012
• He also took advances without collaterals from Enron to the tune of
$4 M.

23
 ENRON..
• Lay organized a get- together of several thousand of Enron employees
and shed crocodile tears and gave them false hope that the company
would find a way to safeguard the shareholders
• It was quoted that, “Lay had no control over his greed and was mad for
more money”
• Thousands of Enron employees who had big chunks of their retirement
savings in company stock have seen the money evaporate.
• In 2004, Lay was convicted was charged on six counts: fraud, conspiracy,
insider trading, money laundering and other criminal charges
• According to legal experts, he could have got 20 to 30 years in prison but
he died of heart attack before the scheduled imprisonment. Jeff Skilling
got 24 years reduced to 14 years and Andrew Fastow got 10 years but
released after serving 5 years
How could this have happenned? Who is accountable?

24
CRIMINALITY
• The legal system, particularly in the US, is slowly shifting
emphasis to prevent misconduct before it occurs.
• The aim is also to encourage cooperation by firms to settle
charges quickly and expose individuals responsible.
• Under the new sentencing guidelines, firms are less likely to be
prosecuted if they cooperate voluntarily with the investigation and
do not shield employees.
• The main effects:
• Encourage organizations to implement ethics programs
• Disclose wrong doing
• Admit guilt
• Provide requisite documents
• Fire employees who refuse to testify

25
CORPORATE COMPLIANCE-
CODE OF ETHICS- 3 TYPES
Code of
conduct
Statement of rules and
standards of conduct
- The most common type of
code identifies acceptable
and unacceptable actions
in a variety of situations
- Also called statements of
business standards or
statement of business
practices
Mission Corporate
Statement Philosophy
A statement of the core A statement describing the
beliefs guiding an
values or vision of the
organization
organization
Generally written by the
- Includes affirmations of founders of the business
and reflects their belief
the commitments of a
system
company to key
stakeholders such as Examples:
employees, customers and
the community - Ethical treatment of
employees
- Sometimes called the
- Providing affordable
credo or statement of
health care
values
26
27
28
CASE- SATYAM
COMPUTERS
• Byrraju Ramalinga Raju was the founder chairman of Satyam
Computers
• He was a management graduate from Ohio University
• He resigned in Jan 2009 admitting corporate fraud.
• The Satyam computer is depicted as, “India’s own Enron”
• The investors were shocked when they heard that the
company had overstated the profits for years and the assets
had been falsified
• The confessions of Raju left the 53000 employees of the 4th
largest IT company in India in the lurch
• The magnitude of the scam was 7136 crores including 5040
crores in non- existent cash and bank balance

29
 SATYAM…
• The real motive was to acquire Maytas companies for $1.6 B.
• Maytas companies were promoted by the family members of Raju
• The plan was to swap fictitious reserves of Satyam with Maytas
assets.
• Out of the 7680 crores to be paid by Satyam to Maytas
companies, a large amount, 7206 crores would go to the Raju’s.
• The unprecedented investor outcry, media pressure and unfavourable
economic conditions played spoil sport to Raju’s plans leading to his
exit from Satyam
• What started as a marginal gap between actual operating profit and
one reflected in the books grew over the years till it attained
unmanageable proportions
• “It was like riding a tiger, not knowing how to get off without being
eaten”

30
 SATYAM..
• Within minutes of the confession, the company and other investors dumped their
shares and investors lost thousands of crores
• Questions were raised about the company’s corporate governance standards
and the future of the company
• The company totally disregarded the principles of justice and benevolence required
for the stability and sustainability of the business
• They promoted their own good at the cost of other stake holders. The management
control was with Raju and his family and they failed to discharge their fiduciary duty
• The case brought into sharp focus the liabilities and responsibilities of the
independent directors of the company
• The independent directors on the board included Vinod K Dham (famously known
as 'father of Pentium’ and an ex-Intel employee), M Rammohan Rao (Dean of
Indian School of Business), U S Raju (former director of IIT Delhi), TR Prasad
(former union cabinet secretary), M Srinivasan (retired professor from many US
universities) and Krishna Palepu (Professor at the Harvard Business School).
• It also brought to focus the role of the auditors- PWC in this case- they were barred
by SEBI from auditing listed companies for 2 years- was also fined BY SEC in the
US to the tune of $ 6 M. Two partners of PWC, Gopalakrishnan and Srinivas were
convicted

31
Questions???

32