Quotation of Corporate Affairs Minister Prem Chand Gupta on Satyam Scam "The current board has failed to do what

they are supposed to do. The credibility of the IT industry should not be allowed to suffer. Interesting But True
Several eminent personalities, including Harvard Business School professor Krishna G. Palepu, former dean of Indian School of Business, Mendu Ramamohana Rao, former Cabinet Secretary T. R. Prasad, Vinod K. Dham and Mangalam Srinivasan were members of the erstwhile board when the scam broke out.

Statutory Duties of BOD

Duty to attend Board meetings. To authenticate and approve annual financial statement. To convene statutory, Annual General meeting (AGM) and also extraordinary general meetings. To appoint first auditor of the company

Liabilities of BOD :
1)Breach of fiduciary duty : Where a director acts dishonestly to the interest of the company, he will be held liable for breach of fiduciary duty. 2) Ultra vires acts : Directors are supposed to act within the parameters of the provisions of the Companies Act, Memorandum and Articles of Association, since these lay down the limits to the activities of the company and consequently to the powers of the Board of directors.

Contd ..
3) When the Board of Directors fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted negligently in discharge of their duties and consequently shall be liable for any loss or damage resulting there from.

Some Points to Ponder

Thorough review of the Corporate Governance norms in India is required in India. We shouldn't adopt corporate governance norms of but start formulating our own. The Satyam scandal has, ironically, uncovered the second most populated country in the world, of having a problem with numbers in terms of finding the requisite number of directors who can exercise their independence while influencing decisions of the board. The challenge for India Inc, is to come out of the mindset that only well known personalities can be nominated as independent directors.

Contd
The shareholders of a company place very high reliance on the auditors report, which apparently shows the true and fair view of the accounts of a company. The auditors should perform their duties with utmost care and vigilance to ensure that there are no illegal or improper transactions. We shouldn't be just confined to punishing Satyams auditors, but they should also re-examine the present system to strengthen and intensify internal audit system.

Satyam Case : A Summary

1) Raju as a chairman, board member and managing director owed certain fiduciary duties to the company and the shareholders. The foremost fiduciary duty that a director owes is the duty to act in the interest of the company and Shareholders : FAILURE TO DO SO. Fiduciary duties : Duty to act on behalf of a company with utmost good faith, utmost care and skill.

Contd .
2) Legal Section :
Section 215 of Companies Act requires the balance sheet to be signed by a manager or secretary, if any, and by two directors, one of whom necessarily must be a managing director.

Section 628 : If any report, certificate, balance sheet, prospectus, statement or other document required by or for the for the purposes of any provisions of the Act is made false or such a person omits any material fact, it shall be punishable with imprisonment for a term which may extend to two years

Contd ..
The independent directors face liability questions because they will have to prove that they were not in breach of fiduciary duty : FAILURE ON PART OF INDEPENDENT DRECTORS.. Ironic but True : Raju in his letter states that the other board members were not aware of the fraud..

Contd .
3) FAILURE ON PART OFINDEPENDENT DIRECTORS AS A PART OF AUDIT COMMITTEE. 4) FAILURE ON PART OF AUDITORS.

Government Action :
1)Immediately after resignation of Raju, MCA drafted the petition to be filed before the Company Law Board. 2) MCA got the CLB order superseding the Satyam board with government appointed directors. 3)Referring the Case to SFIO , a 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

Finally .
TECH MAHINDRA ACQUIRED SATYAM, RENAMED IT AS MAHINDRA SATYAM AND REPLACED ITS EXECUTIVE BOARD AND AUDITORS

FICCI Response to issue of Independent Directors Real issue is not the quantity but the quality (i.e. effectiveness) of independent directors. A look at the active independent directors, as they are now in some companies will reveal that several lack adequate knowledge of the company, its business model and risk profile, and many do not even attend the meetings regularly.

Contd .
The truly independent directors must be competent, committed and have an independent state of mind to challenge and ask the right questions and be able to provide insight for the growth of the company. Corporate Governance is no longer a nice to have but a must have. Let the shareholders and the Board decide as to how many of independent Directors would be adequate to have effective governance for their company.

Some recommendation.
1) Appointment and remuneration of auditors should not be left to the companies they audit, as the fees can easily influence the auditors report. A better option would be to pool in money and hand it over to the stock exchanges that can appoint auditors. This will make the auditors answerable to the bourses and not corporate executives . 2) Forensic auditors should be used to unearth evidence of wrongdoing, which needs a combined team of people from the police or the CBI, lawyers etc.

Contd..
ROTATE THE WATCHDOGS: FIXED, FINITE AND ROTATING TENURE :
Auditors and independent directors are the first line of defense against abuse for ordinary investors. The best strategy would be to have one watchdog watch the other. Suggestion : A fixed tenure for auditors for a finite period of three years can be suggested . At the end of his tenure, the auditor will have to hand over his assignment to a new auditor.
Reason : The new auditor will take a sign off from the previous auditor and it would be reasonably difficult for any auditor to assist in perpetuating wrongdoings if there is a more than reasonable chance of being discovered by the new incoming auditors. This could be a simple and effective deterrent against wrongdoing.

Contd
MAKE INDEPENDENT DIRECTORS TRULYINDEPENDENT WITH A FINITE TENURE : Suggestion : Independent directors be chosen from a pool of qualified professionals who are known for their expertise and integrity. Further, like the auditors, they should be chosen for a fixed tenure of three years, after which they should be replaced by another set of independent directors from the identified pool of independent directors.

Contd ..
Reason : The independent director chosen by management is chosen because of his proximity to the controlling management and is beholden to management for selecting him to the board of the company. This raises serious conflicts of interest in impartial discharge of duties. Many independent directors are not technically and professionally qualified to head the committees they chair in the companies.

Contd
How the independent Directors and Auditors can be selected ? . A Suggestion :
1. A thorough and open vetting process at the selection stage itself is critical for this initiative to succeed. The internet can be used effectively for this. The list of eligible candidates and their resumes and qualifications should be posted on the internet and public feedback invited. The feedback received should be considered on due merit.

Contd ..
2)The watchdogs should be divided into various categories depending on their size and experience in the case of auditors, and experience and qualifications in the case of independent directors. An appropriate match between experience, size and qualifications of these watchdogs and the size of the companies where they are to be appointed should be made. The companies should be given a slate of eligible independent directors from which they can choose the directors.

Contd.
3) A 360 degree feedback system could be used to monitor the performance of the watchdogs and keep the pool fresh with movement between the various categories dependent on skill sets and feedback. 4) Subsidiaries over a certain size should have different auditors than the parent company. Subsidiary companies which are over a certain size relative to the size of the parent company should not be audited by the same set of auditors auditing the parent company.

Corporate Governance vs. Corporate Performance

As per the Crisil Rating Agency corporate governance survey results conducted during February 2004 . Many Investors believed that there is a strong linkage between good corporate governance and good long run corporate performance.

Results as per the survey More that 40% of the respondent felt that there is a strong linkage while nearly 50% felt that the linkage was moderate. Only a very small percentage felt that there is no linkage.

A VIEW ON ECONOMIC TIMES CORPORATE GOVERNANCE SURVEY

The Economic Times Corporate Governance Survey uses 6 parameters to evaluate the rank of an organization. They are a) Accounting Quality b) Value creation Focus c) Fair Policy and Action d) Communications e) Effective governing Board f) Reliability 40 companies were taken. They were ranked by 147 strong samples of top fund managers and brokers. The respondents were from Mumbai (46%), Delhi (20%), Kolkata (20%), Chennai (14%).

Company INFOSYS Tata Steel Wipro Hdfc Bank HDFC

Overall Ranking 1 2 3 4 5 6

Sector Wise Ranking 1 2 3 4 5 6 7 8 9 10 11 -----

Value Creation ranking 1 2 --4 6 9 3 7 11 --10 8 20

Tata Motors Reliance Industries ITC Ranbaxy Hindustan Lever Hero Honda Motors Larsen and Toubro State Bank of India 7 8 9 10 11 12 13

Bajaj Auto

14

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