Business Ethics and Corporate Governance

Quotation from the Arthshastra ( Chanakya) Citizens never support a weak company and birds do not build nests on a tree that does not bear fruits.

Definition of Corporate Governance

Corporate governance can be defined as a system by which the business entities are monitored, managed and controlled. Corporate Governance is defined as the set of processes , systems and principles which ensures that the company is governed in the best interest of the stakeholders.

OBJECTIVES OF CORPORATE GOVERNANCE :

Transparency in Business Transactions . Statutory and Legal Compliances Protection of Shareholders Interest . Commitment to values and ethical conduct of the Business. Developing appropriate strategies that result in the achievement of stakeholder objectives by maximizing the value to the stakeholders.

The requirement of effective corporate governance are as follows :

Requirements Due Process Transparency

Meaning Doing things in a agreed and documented manner Doing things in a open way which is appropriate

Accountability
Compliance

Having to answer for things one does

Having system to ensure that things are done properly Meeting legal obligations Having system to ensure that protection of information

Laws Security

SATYAM FIASCO
Role of Independent Director Role of Audit Committee / Auditors Role of Board of Directors Role of Shareholders

Satyam or Asatyam
Brief History :
Founded in the year : 1987 Founder cum Chairman : B.Ramalinga Raju Main Area : Information Technology Services in various sectors . Network Coverage : 67 Countries in 6 continents employs approx 40000 IT professionals across development centers in India, UK, UAE, Canada, Hungary, China, Japan etc . Apart from Hyderabad it has development centers in Bangalore, Chennai, Pune , Kolkata, Delhi Nagpur etc. Interesting But True : It served over 654 global companies, 185 of which are Fortune 500 corporations

CONFESSIONS OF RAJU
Dated 7th Janary,2009 1. Inflated (non-existent) cash and bank balances of Rs 5,040 crores on the balance sheet as of September 30, 2008. 2. An understated liability of Rs 1,230 crores on account of funds. 3. An overstated debtors position of Rs 490 crores. 4. An accrued interest of Rs 376 crores which is non-existent.

Satyam Shocker
For the September quarter, Satyam fraudently reported a revenue of Rs 2,700 crores and an operating margin of Rs 649 crores (24% of revenues) as against the actual revenues of Rs 2,112 crores and an actual operating margin of 61 crores (3% of revenues).

ROLE OF INDEPENDENT DIRECTORS

LISTING AGREEMENT

Clause 49 of its listing agreement :

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 some major amendments based on the report on this committee in 2003.

Who is a Independent Director?

Defination :

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 may affect independence of the director.

Other points added to test the independency

1)He is not related to promoters or persons occupying management positions at the board level or at one level below the board. 2) He has not been an executive of the company in the preceding three financial years. 3) He is not a material supplier, service provider or customer or a lessor or lessee of the company. 4) He is not a substantial shareholder of the company owning two percent or more of the block of voting shares

Contd ..
He is not a partner or an executive or was not partner or an executive during the preceding three years of (a) the statutory audit firm or the internal audit firm that is associated with the company and (b) the legal and consulting firms that have material association with the company

Other Defination of independent Directors (by Other Reports)

THE CADBURY REPORT (1992)

Apart from their directors fees , 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 apart 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.

Applicability of Clause 49
Composition of Board
The Board of directors of the company shall have an optimum combination of executive and non-executive directors with not less than fifty percent of the board of directors comprising of non-executive directors Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors

Reasons for having Independent Directors on Board

Not to pack the board with Yes Men . Ensure legal and ethical behavior at the company, while strengthening accounting controls. Extend the reach of a company through contacts, expertise, and access to debt and equity capital.

Are the Independent Directors actually Independent ? Independent directors are nominated by the management and are at the mercy of the promoters and should be well known to the Promoters. They need the support of promoters grop for re-election.

Satyam Case
Independent Directors Profile : Mangalam Srinivasan (holds a Ph.D. in technology from
George Washington University, a Master of Business Administration degree (international finance and organization) from the University of Hawaii, a Master of Arts degree (English) from Presidency College, Madras University and was an Advanced Special Scholar (astronomy and physics) at the University of Maryland )

Vinod Dham (Entrepreneur) :acknowledged Father

of the Pentium microprocessor.

Krishna Palepu (Harvard professor) M. Rammohan Rao (Indian School of Business dean)

Resignation of Independent Directors

Three independent directors resigned on 29th December, 2008.

Comments :
The independent directors contended that since the company was so highly appreciated for its governance, they never suspected any foul play took placed and believed the things they were being told.

Ironic but True :

SATYAM won the Golden Peacock Global Award for Excellence in Corporate Governance for 2008