UGC SPONSORED NATIONAL SEMINAR ON CORPORATE CRIME AND GOVERNANCE ISSUES, CHALLENGES AND REMEDIES

Mrs. Kamala Balakrishnan(Author) Dean and H.O.D-Commerce & Mrs.S.Radha(Co-Author) H.O.D-Corporate Secretaryship
Annai Violet Arts and Science College No.53,Violet Road,Menambedu, Ambattur,Chennai-53

Corporate Crime and Governance, - Issues Challenges and Remedies "

Mrs. Kamala Balakrishnan(Author) Dean and H.O.D-Commerce & Mrs.S.Radha(Co-Author) H.O.D-Corporate Secretaryship Annai Violet Arts and Science College No.53,Violet Road,Menambedu, Ambattur,Chennai-53

CORPORATE GOVERNANCE Abstract Corporate governance has become one of the most prominent topics for management scholars, top executives, and regulators alike over the last couple of decades. Originally a domain of economics and finance (as well as law), the theme has spread to other areas such as strategic management and organization theory in recent years. Scandals associated with corporate frauds in India and other countries in the last two years have augmented aversion to risk mainly in development countries. The correlation between corporate governance and credit/investments is now closely monitored by banks, institutional investors and development institutions. This paper will first give a brief overview on major developments in the field of corporate governance in India and discusses key unresolved issues against the backdrop of sweeping reforms in the stock market structure, systems and regulation.

CORPORATE CRIME AND GOVERNANCE ISSUES, CHALLENGES AND REMEDIES

CORPORATE GOVERNANCE Introduction Corporate governance is a concept, rather than an individual instrument. It includes debate on the appropriate management and control structures of a company. It includes the rules relating to the power relations between owners, the board of directors, management and the stakeholders such as employees, suppliers, customers as well as the public at large. In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal Corporations around the world are increasing recognizing that sustained growth of their organization requires cooperation of all stakeholders, which requires adherence to the best corporate governance practices. In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders. In India, corporate governance initiatives have been undertaken by the Ministry of of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI). The first formal regulatory framework for listed companies specifically for corporate governance was established by the SEBI in February 2000, following the recommendations of Kumarmangalam Birla Committee Report. It was enshrined as Clause 49 of the Listing Agreement. Further, SEBI is maintaining the standards of corporate governance through other laws like the Securities Contracts (Regulation) Act, 1956; Securities and Exchange Board of India Act, 1992; and Depositories Act, 1996.

Definition Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations. Corporate Governance may be defined as a set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders. It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability. In other words, 'good corporate governance' is simply 'good business'. It ensures:
    

Adequate disclosures and effective decision making to achieve corporate objectives; Transparency in business transactions; Statutory and legal compliances; Protection of shareholder interests; Commitment to values and ethical conduct of business.

The fundamental objective of corporate governance is to enhance shareholders' value and protect the interests of other stakeholders by improving the corporate performance and accountability. Hence it harmonizes the need for a company to strike a balance at all times between the need to enhance shareholders' wealth whilst not in any way being detrimental to the interests of the other stakeholders in the company.
 

    

A properly structured board capable of taking independent and objective decisions is in place at the helm of affairs; The board is balance as regards the representation of adequate number of nonexecutive and independent directors who will take care of their interests and well-being of all the stakeholders; The board adopts transparent procedures and practices and arrives at decisions on the strength of adequate information; The board has an effective machinery to subserve the concerns of stakeholders; The board keeps the shareholders informed of relevant developments impacting the company; The board effectively and regularly monitors the functioning of the management team; The board remains in effective control of the affairs of the company at all times.The overall endeavour of the board should be to take the organisation forward so as to maximize long term value and shareholders' wealth.

Prerequisites and Constituents Today adoption of good Corporate Governance practices has emerged as an integral element for doing business. It is not only a pre-requisite for facing intense competition for sustainable growth in the emerging global market scenario but is also an embodiment of the parameters of fairness, accountability, disclosures and transparency to maximize value for the stakeholders. Studies of corporate governance practices across several countries conducted by the Asian Development Bank, International Monetary Fund, Organization for Economic Cooperation and Development and the World Bank reveal that there is no single model of good corporate governance There are three different forms of corporate responsibilities which all models do respect:


Political Responsibilities: the basic political obligations are abiding by legitimate law; respect for the system of rights and the principles of constitutional state. Social Responsibilities: the corporate ethical responsibilities, which the company understands and promotes either as a community with shared values or as a part of larger community with shared values. Economic Responsibilities: acting in accordance with the logic of competitive markets to earn profits on the basis of innovation and respect for the rights/democracy of the shareholders which can be expressed in terms of managements' obligation as 'maximizing shareholders value'. In addition, business ethics and corporate awareness of the environmental and societal interest of the communities, within which they operate, can have an impact on the reputation and long-term performance of corporations. The three key constituents of corporate governance are the Board of Directors, the Shareholders and the Management. Board of Directors :The pivotal role in any system of corporate governance is performed by the board of directors. It is accountable to the stakeholders and directs and controls the management. Share holders: The shareholders' role in corporate governance is to appoint the directors and the auditors and to hold the board accountable for the proper governance of the company by requiring the board to provide them periodically with the requisite information in a transparent fashion, of the activities and progress of the company. Management : The responsibility of the management is to undertake the management of the company in terms of the direction provided by the board, to

put in place adequate control systems and to ensure their operation and to provide information to the board on a timely basis and in a transparent manner to enable the board to monitor the accountability of management to it. The underlying principles of corporate governance revolve around three basic interrelated segments. These are:
  

Integrity and Fairness Transparency and Disclosures Accountability and Responsibility

Legal Framework An effective regulatory and legal framework is indispensable for the proper and sustained growth of the company. The important legislations for regulating the entire corporate structure and for dealing with various aspects of governance in companies are Companies Act, 1956 and Companies Bill, 2004. These laws have been introduced and amended, from time to time, to bring more transparency and accountability in the provisions of corporate governance. That is, corporate laws have been simplified so that they are amenable to clear interpretation and provide a framework that would facilitate faster economic growth. Secondly, the Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India Act, 1992 and Depositories Act, 1996 have been introduced by Securities and Exchange Board of India (SEBI), with a view to protect the interests of investors in the securities markets as well as to maintain the standards of corporate governance in the country.

Corporate Governance Development in India: A Timeline Irani Committe Enactment of (MCA Appointed) Clause 49 Chandra Committee

Companies Bill (2009) Considered MCA Voluntary

(MCA Appointed) CII CG Taskforce Murthy Committee (SEBI Appointed) Clause 49 Amendments Impleme nted CG Guidelines NAS COM CG Recom mendati ons

19 96

19 98

2000

2002

2004

20 06

20 08

Birla Committee \ (SEBI Appointed)

Clause 49 Amended

2 0 1 0 Listing Agreement Amended CII CG Recommendations

CII Code

Companies Bill (2003) considered Satyam Scandal

Companies Bill (2008) Considered

Clause 49 of the Listing Agreement to the Indian stock exchange comes into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies.In corporate hierarchy two types of managements are envisaged: i) companies managed by Board of Directors; and ii) those by a Managing Director, whole-time director or manager subject to the control and guidance of the Board of Directors.
y

As per Clause 49, for a company with an Executive Chairman, at least 50 per cent of the board should comprise independent directors. In the case of a company with a non-executive Chairman, at least one-third of the board should be independent directors. It would be necessary for chief executives and chief financial officers to establish and maintain internal controls and implement remediation and risk mitigation towards deficiencies in internal controls, among others. Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form. The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report. A company is also required to obtain a certificate either from auditors or practising company secretaries regarding compliance of conditions as stipulated, and annex the same to the director's report. The clause mandates composition of an audit committee; one of the directors is required to be "financially literate". It is mandatory for all listed companies to comply with the clause by 31 December 2005.

Indias corporate governance reform efforts did not cease after adoption of Clause 49. In January 2009, the Indian corporate community was rocked by a massive accounting scandal involving Satyam Computer Services (Satyam), one of Indias largest information technology companies. The Satyam scandal prompted quick action by the Indian government, includ-ing the arrest of several Satyam insiders and auditors, investigations by the MCA and SEBI, and substitution of the companys directors with government nominees.

As a result of the scandal, Indian regulators and industry groups have advocated for a number of corporate gover-nance reforms to address some of the concerns raised by the Satyam scandal. Some of these responses have moved forward, primarily through introduction of voluntary guidelines by both public and private institutions. However, corporate governance measures through comprehen- sive revision of the Companies Act (1956) have yet to be enacted. To further enhance their confidence and to safeguard retail investors, Sebi has revised clause 49 of its listing agreement, which stipulates that at least one-third of the directors on the boards of the companies should be independent professionals. These directors should in no way be connected to the interests of promoters.  Corporate governance is vital to integrity and efficiency of financial markets. It implies a well-defined, well-structured and well-communicated system to manage, direct and control the conduct of business of a company.  Major changes have been made to the definition of independent directors, strengthening of the responsibilities of audit committee and improving the quality of financial disclosure.  The board as a whole has been tasked with the adoption of a formal code of conduct for senior management and the certification of financial statements issued by the CEO/CFO.  The companies are required to form various committees like nomination committee, compensation committee, governance committee, to adhere to corporate governance.  The main objective of these committee is to bring about objectivity in determining the remuneration package while striking a balance between the interest of the company and the shareholders.  The new law also requires the nomination committee of the board to be composed entirely of independent directors, who in return would be responsible for the evaluation and nomination of board members. This, hopefully, will open a new chapter in Indian corporate governance procedures and compliance. The issue of corporate guidelines acquired centre stage as a result of the huge foreign investmets coming into India. These foreign investors wish to be assured that the companies they invest their money in will be managed well, and expect the law of the land to be open and transparent in functioning.

Importance corporate Governance Good Corporate Governance standards add considerable value to the operational performance of a company by: 1. improving strategic thinking at the top through induction of independent directors who bring in experience and new ideas; 2. rationalizing the management and constant monitoring of risk that a firm faces globally; 3. limiting the liability of top management and directors by carefully articulating the decision making process; 4. assuring the integrity of financial reports, etc. It also has a long term reputational effects among key stakeholders, both internally and externally. Effectiveness of corporate governance system cannot merely be legislated by law neither can any system of corporate governance be static. As competition increases, the environment in which firms operate also changes and in such a dynamic environment the systems of corporate governance also need to evolve, the instances of financial crisis have brought the subject of corporate governance to the surface. They have shifted the emphasis on compliance with substance, rather than form, and brought to sharper focus the need for intellectual honesty and integrity. This is because financial and non-financial disclosures made by any firm are only as good and honest as the people behind them.


   

Good governance system, demonstrated by adoption of good corporate governance practices, builds confidence amongst stakeholders as well as prospective stakeholders. Investors are willing to pay higher prices to the corporates demonstrating strict adherence to internally accepted norms of corporate governance. Effective governance reduces perceived risks, consequently reduces cost of capital and enables board of directors to take quick and better decisions which ultimately improves bottom line of the corporates. Adoption of good corporate governance practices provides long term sustenance and strengthens stakeholders' relationship. A good corporate citizen becomes an icon and enjoy a position of respects. Potential stakeholders aspire to enter into relationships with enterprises whose governance credentials are exemplary. Adoption of good corporate governance practices provides stability and growth to the enterprise.

Failure to implement good governance procedures has a cost in terms of a significant risk premium when competing for scarce capital in today's public markets.

Suggestions Corporations are the prominent players in the global markets. They are mainly responsible for generating majority of economic activities in the world, ranging from goods and services to capital and resources. The essence of corporate governance is in promoting and maintaining integrity, transparency and accountability in the management of the company as well as in manifestation of the values, principles and policies of a corporation. Many efforts are being made, both at the Centre and the State level, to promote adoption of good corporate governance practices, which are the integral element for doing and managing business. However, the concepts and principles of good governance are still not clearly known to the Indian business set up. Hence, there is a greater need to increase awareness among entrepreneurs about the various aspects of corporate governance. There are some of the areas that need special attention, namely:  

Quality of audit, which is at the root of effective corporate governance; Role of Board of Directors as well as accountability of the CEOs and CFOs; Quality and effectiveness of the legal, administrative and regulatory framework; etc.

That is, it is necessary to provide the corporates desired level of comfort in compliance with the code, principles and requirements of corporate governance; as well as provide relevant information to all stakeholders regarding the performance, policies and procedures of the company in a transparent manner. There should be proper financial and non-financial disclosures by the companies, such as, about remuneration package, financial reporting, auditing, internal controls, etc. Conclusion Since the late 1990s, significant efforts have been taken by Indian regulators, as well as by Indian industry representatives and companies, to overhaul Indian corporate governance. Not only have reform measures been put into place prior to discovery of major corporate governance scandals, but both industry groups and government actors have sprung into action following the Satyam scandal. The current corporate governance regime in Indian straddles both voluntary and mandatory requirements. For listed companies, the vast majority of Clause 49 requirements are mandatory. It remains to be seen whether some of the more recent voluntary corporate governance measures will become mandatory for all companies through a comprehensive revision of the Companies Act

APPENDIX-1 SATYAM SCANDAL

Satyam Computer Services was a publicly traded com-pany listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in India, and cross-listed on the New York Stock Exchange (NYSE) in the United States. While Satyams promoters, represented by Mr. Ramalinga Raju and his family, held 8 percent of the shares in the company at the end of 2008, the company had a majority independent Board of Directors comprised of several Indian luminaries. Described as a gold-plated group, Satyams independent directors included a Harvard Business School professor, the then-dean of the Indian School of Business and a former Indian cabinet secretary in India. In early 2009, Satyam experienced two related scandals, the first an aborted related-party transaction involving the companys promoters, the second the uncovering of colos-sal fraud in the companys financial statements. The Maytas transaction On December 16, 2008, Satyams Board convened a meeting to consider the proposed acquisition of Maytas Infra Limited and Maytas Properties Limited, companies focused on real estate and infrastructure development. Two major issues in the proposed transaction surfaced. First, the Maytas companies were focused on real estate and infrastruc-ture development two industries unrelated to Satyams core information technology business. Second, the Raju family owned approximately 30 percent of the Maytas companies. If effected, this related-party transaction would have resulted in a significant amount of cash flow-ing from Satyam . . . to its individual promoters, the Raju family. While several of Satyams independent directors questioned the proposed transaction, the board eventual-ally adopted a resolution to proceed with the proposed acquisition. Satyam notified the stock exchanges of the board approval as required under the listing agreement. The market reacted badly to the news, and the company quickly withdrew the Maytas proposal.

Financial fraud On January 7, 2009, shortly after the failed Maytas transaction, Raju confessed to falsifying the financial statements of the company, including balance sheet errors showing fictitious cash assets of over US$ 1 billion. The confession furthered revealed that the proposed Maytas acquisitions were just illusory transac-tions intended to manipulate the balance sheet of Satyam and to wipe out inconsistencies therein. As a result of this information, Satyams stock price dropped another 70 percent, essentially obliterating the wealth of the Satyam shareholders. As a result of the scandal, the MCA, Government of India, and the SEBI initiated investigations. The police arrested Raju, Satyams managing director, and the companys CFO within a few days of the confession. Two partners from Lovelock & Lewis, an Indian affiliateof PriceWaterhouseCoopers and Satyams auditor, were also arrested. Further, the government nominated and replaced remaining Satyam board members with candid-dates of its choice. Under the new leadership, Satyam was able to make a remarkable turnaround. In April 2009, Tech Mahindra purchased the company through a global bidding process. The concerns raised by the Satyam scandal reverberated in corporate India more broadly. For example, in a recent study, the authors found evidence of mass resignations of independent directors of Indian firms following Satyam with at least 620 independent directors resigning in 2009 alone a figure that is . . . by far without precedent globally.

APPENDIX-2
A Brief Overview of Corporate Governance Reforms in India
Clause 49, the Companies Bill, 2009, and the Standing Committee on Finance Report: Differences With Respect to Public Company Independent Director Provisions
Clause 49 Companies Bill (2009) MCAs Current Proposal in Response to Standing Committee on Finance Report

Number of Directors on the Board

(I)(A)(i): The Board of directors of the company must have an optimum combination of executive and non-executive directors

Clause 132(1): For public companies, the Board of Directors must have a minimum of three directors and a maximum of twelve directors, excluding the directors nominated by the lending institutions.

Chapter XI Clause 132:

For public companies, the Board of Directors must have a minimum of three directors and a maximum of fifteen directors, excluding the directors nominated by the lending institutions;

a company may appoint more than fifteen

directors after passing a special resolution and after obtaining prior approval of [the] Central Government in this regard.

Minimum Number of Independent Directors

(I)(A)(i)-(ii):

Where the chairman holds

an executive position in the company or when the nonexecutive chairman is a promoter or a person related to any promoter of the company, at least one half of the board should consist of independent directors

Clause 132(3): Independent directors must comprise onethird of the board for listed companies

Chapter XI Clause 132(3): Independent directors must comprise one-third of the board for listed companies.

Otherwise, one- third of

the board should consist of independent directors. Definition of (I)(A)(iii)(a): An independent Independence director is defined as a nonexecutive director who Clause 132 (5): An independent director is defined as a non-executive director Chapter XI Clause 132(5): The definition of independent director remains largely the same as in the Companies Bill, 2009, except as follows:

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;

who in the opinion of the

Board, is a person of integrity and possesses relevant expertise and experience;

Neither an independent director nor his/

her relatives may have a pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or its promoters, or directors, amounting to two per cent or more of the companys gross turnover or total income, during the two immediately preceding financial years or during the current financial year.

who neither the independent director nor his/her relatives:

References 1. SEBI Committee on Disclosures and Accounting Standards, Discussion Paper on Proposals Relating to Amendments to the Listing Agreement (Sep. 2009), available at www.sebi.gov.in/commreport/ amendproposal.pdf. 2. Chakshu Roy & Avinash Celestine, Legislative Brief: The Companies Bill, 2009, PRS Legislative Research (Aug. 18, 2009), companies. 3. National Foundation for Corporate Governance, Corporate Governance in India: Theory and Practice (Sept. 2004). 4. .http://www.nfcgindia.org/library_int.htm - National Foundation for Corporate Governance 5. http://www.wikipedia.org. 6. http://www.ita.doc.gov/goodgovernance/ -International Trade Administration 7. http://www.corpgov.net/ - Corporate governance network 8.http:// www.conferenceboard.org 9.http://www.sebi.gov.in/ - Securities and Exchange Board of India.