Corporate Governance Exam Paper

Games Directors play While analysing the Reality of bestrideroom we say many games and t presentics often diligent by acquireors so that they dont lose power. Some such games were alliance, coalition, lobbying, sc atomic number 18mongering, log rolling etc. Here also majority of BOD were rough and dear matchlesss of Bright so everybody chose to stay quiet about what is going on. Under-reserving Like we say in the HLL case under-reserving is a tactic used by firms but in the long run it cant stop companies from collapsing. Role of independent directors The question Are independent directors really independent has been topic of confer for ages.In the case the role played by independent directors is insignificant. Also it is questionable whether independent directors were present and in the number advised by law or not. Audit Committee The case talks about KPMG and the arguable role it played but what about the audit committee, was it existent, if so how was it functioning. Its c omposition and leadership involve attention. Manipulation Most of the cases of accounting frauds, falsifying records, deceiving shareholders and bankruptcy rest upon the manipulation of the balance sheet and the tactics used to fudge the data.Ex Enron The company needs to run through inspiration from firms like GSK, Infy, and tata which serve as examples of good CG. GSK * Chairman of placard is independent director on with 5 others in in board. Transparency is de terminal figureine Infosys * Creating wealth legally and ethically Tata * One of the giants and still fascinating politics * In sync with the values * Very elaborate code of conduct Board composition and structure One of the major flaw ways in the board structure is everyone was quiet about the rising storm dominated by power and status of Bright.There should be some independent directors with ability to question the acts and deeds and the following structures are recommended. European Two Tier model Shareholders supe rvisory board Executive board Management Employees and staff The supervisory board overlooks functions of executive board and can question and alter the function This model is preferred over unitary board. Chinese model Here we see the presence of the state as a whole also takes society into account along with shareholders Board Leadership One of the major causes of the downfall was the role played by Bright.He was forceful and rigid and thus not a true leader. The features desired for a leader are Integrity The ability to differentiate between right and wrong and govern in a manner that it is morally coiffe and sustainable Independence The board was like a dummy/puppet with no or very less degree of independence Intellect The creative thinking must not come out in form of manipulation and fraud but the betterment of the firm Character He must be ethical and strong character Personality A leader must be flexible and open to new ideas and suggestions. The personality is the holist ic perspective.Communication skills, good listener, bonus etc. Board level information Desired CG was not in place and there was no clear information pathway. The board did not find out or authenticate the actions. Control systems The case clearly shows violation of many acts and laws. The board was not conforming to the supervisory work. The ascendancy system was not in place. Auditors at fault In cases like Enron and worldcom it has been seen that the external auditors are able to flee away leaving the company in distress. Usually there are tie ups between management and auditors, some internal settlement that leads to uch actions. Role of internal audit committee is arguable. The company should have gone to auditors like Delloitte who are reliable and tested. Risks that should be considered Financial risk. Operational, compliance, Business Four aspects of CG Internal control, risk management, behavioural governance, independence Sarbax oxley act This is one of the landmark ac ts that came in 2002 after Enron and Worldcomm It says pitiful and civil penalties for compliances and accounting frauds, certificate for internal audits and annual report is to submitted by all public and private listed companies.Also introduce PCAOBA (Public company accounting oversight board of America) Was criticized for high cost of compliance CG is a process by which companies are directed and controlled Many attempts have been made to define CG and this one by Cadbury is one of the most comprehensive . Cadburys definition Corporate governance is the system by which companies are directed and controlled. The boards of directors are responsible for the governance of their companies. The shareholders role in governance is to appoint the directors and the auditors to satisfy themselves that an appropriate governance structure is in place.The responsibilities of the board include setting the companys strategic aims, providing the leadership to put them into effect, supervising t he management of the business and reporting to shareholders on their stewardship. The boards actions are subject to laws, regulations and the shareholders in general pick uping. Mike and minnow Corporate regime is a process of governing and directing the performance of any company and the major actors involved are directors, management, society and shareholders CG is basically to overlook, monitor, control and direct the functioning of the management.For this we have BOD and the code of conduct. Some acts, laws and norms facilitate this process of governance. Scope from least to highest Society Media and Press Shareholders Regulatory bodies Contractual Stakeholders Auditors Governance and Management (Diagram) As it is clear that the scope of CG is very wide. It is crucial that CG is acceptable and answerable to many. Functions of the board Majorly there are four functions of the board depending upon the conformity to other(prenominal) or existing and the performance expected for future.The four functions are accountability, strategy formulation, supervising and monitor and policy making Matrix The accountability along with monitoring and supervising is the conformance part i. e. to past or existing situation. The policy making and strategy formulation comes under the performance part with focus on future value. Usually it is seen that independent directors are forced to conformance because they only understand what is going on. Strategic Formulation * This is the most crucial step of governance There must be shared view according to which governance and management abide * It involves SWOT, PEST, Porter analysis and asking of crucial questions of long term strategic importance * It is important to have helicopter vision balanced of long and short term * San Tzu Think the mind alike of your enemy form _or_ system of government making * This comes from the strategic formulation * Policies are rules, regulation and procedures that must be followed and abided Supervision & monitoring This is the conformance part to prepare that everything is happening as per the policies and rules or not Accountability * Accountability is to have right system wherein respective people are accountable for any error or aberration * lonesome(prenominal) the top management is not accountable but usually is held responsible. Normative How board thinks directors should spend their time How directors actually do spend their time copulation between functions Strategy formulation Policy making supervision and monitoring Accountability Roles Agents and Stewards Agency theoryPrincipal shareholders contract with agents seek self interest It says that it is not possible that agents take care of other money with as much vigilance of vow. They seek personal interest and detrimental effect on shareholders Stewardship theory Owners chose and cull stewards(directors) who play the role of stewards Contrary to agency theory it says owners vest their trust in directors who act as stewards of shareholders money. Along with the board the following roles are performed by the director Managing the board Managing the meeting Strategic leadership Cooperation between board and management Companys face to publicBy means of all these functions and roles the board makes an feat towards fair and equitable distribution of profit, ethical governance of firm and deters any unethical behaviour It lays clear rules, norms, laws and code of conduct to facilitate governance maxwell communication 1991 Risky acquisition using pension funds leading to bankruptcy Bank of credit and commerce international Cadbury report 1992 best practices suggested How to go for it? For a company to enter in stockmarket it has to that it follows Cadbury suggestions Corporate governance is directly related to market valuation of a company.Better managed companies are valued more. Enron failure 2001 untimely accounting policies creation of special purpose entities to conceal losses excessive executive compensation Worldcom 2002 The BOD did not oppose the ambitious investment of Worldcom in fiber optic cables and infrastructure to become a market leader (a short term goal). This led to huge losses when the boom for dot com ended. Measures to check such scenarios * Make BOD accountable to stakeholders * Make changes in structure * Clearly explain the responsibilities of Board Make them active board in swelled a leadership to the company * Make the BOD to meet more frequently listed company at least 4 times a yr * Lay down an agenda about what must be discussed Placing constraints, checks on management power including the CEO Eg SKF micro finance CEO was sacked as he is no good There should be separation of position of chairman and CEO Ensuring a sound system of internal control and proper disclosure of financial information and executive compensation Auditors are continuing from 20 years Approaches to strengthen the CG 002 there was a proposal to change companies act 1956 2012 the bill was proposed in loksabha Very lengthy process to make a law But then one law for all companies reduces flexibility In 1998 CII appointed a committee under Rahul bajaj to create guidelines for cg which is only voluntary. Only 0. 1% adopted them. Voluntary Purely legal approach Cg code statute a set of practices, guidelines which are expected to be followed by the companies 2 approaches for cg code 1) Principle based lay down broad principles comply or explain principles link it with listing.Make the companies which are not adopting explain why they are not adopting 2) Rule based approach comply or get prosecuted in extreme cases companies are delisted. But then the shareholders are effected. Rule based approach is rigidity. The companies will try to outsmart the rules if they are rigid. Eg BJP chief Nitin Gadkari driver was shown as a director in a company. The directors get huge money for just attending 4 meetings, so they agree with whatever th e companies say to gather in easy money or else they would be removed from the board.CG in India * The issue of CG has come up mainly in the wake up economic reforms characterized by liberalization, privitization and globalization. * The way foreign investments is CG * The last point in previous year * SEBI committee on CG headed by SHri Kumara Mangalam Birla submitted its report in Feb 2000 * Clause 49 in listing agreement with stock exchanges made it mandatory for companies to follow recommendations by Kumara M B committee * Then Naresh Chandra committee is appointed by the .. Indian Code Inspired by Cadbury code, 1992 * CII code 1998 (voluntary compliance could not make much difference) Implementation 2005 all the companies above 3 crore revenues Audit committee * As an interface between the board and auditors atleast 3 members (NED) majority of independent directors * Looks after all the activities related to auditors i. e. appointment of reappointement of auditors * Reviewin g of internal reports * Audit committee must meet 4 times a year * Gap should not be more than 4 months Disclosures Management discussions and analysis report * Related party legal proceeding * Remuneration to NEDs Clause 49 Case of satyam First biggest and most shocking scam involving . Modus operandi of the scam * Super user login to some employees * Entering fake invoices * hike up revenues and profits * Falsified bank statements * Falsified interest income Role of board in satyams case Overlooking the reports The board said ok to all proposals by raju to direct funds to acquire lands in hyd Directors had a salary of rs 12 lakh annually