Corporate Governance

Introduction Pillars Need Laws

Background Scandal Key players Impact Verdict

Background Scandal Key Players Impact Verdict

Background Scandal

Background Scandal Key players Impact Verdict Conclusion

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Corporate Governance

Corporate Governance
Corporate Governance refers to the structures and processes for the efficient Direction and proper control of companies (Both private and public) in the interest of all stakeholders

Four pillars of Corporate Governance

1. Accountability 2. Fairness 3. Transparency 4. Independence
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Four Pillars of Corporate Governance

1.

Accountability:Ensure that management is accountable to the Board Ensure that the Board is accountable to shareholders

2.

Fairness:Protect Shareholders rights Treat all shareholders including minorities, equitably Provide effective redress for violations
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Four Pillars of Corporate Governance

3.

Transparency:Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance.

4.

Independence:Procedures and structures are in place so as to minimize, or avoid completely conflicts of interest Independent Directors and Advisers i.e. free from the influence of others

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Need
Retirement funds lost! Thousands of workers lose their pension funds!

Multiplying layers of entities and hidden movement of capital and goods causes collapse of...

Shell corporations and bank confidentiality and secrecy havens discovered at...
Executives investments and illegal actions... Government levies a record fine on accounting firm

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Laws
1.
1. 2. 3. 4.

Cadbury Report -1992

Wider use of INDEPENDENT DIRECTOR Introduction of AUDIT COMMITTEE Separation between CHAIRMAN and CEO Adherence to detailed code of BEST PRACTICES.

2.
1. 2. 3. 4. 5. 6.

Sarbanes Oxley -2002 (Public Company Accounting Reform and Investor Protection Act (2002))
CEOs CFOs certify accuracy Fines up to $1 million/10 years No personal loans to executives Auditing procedures, incl. rotation Whistle blower protection Attorneys must report violations

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Corporate Governance

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Corporate Governance

Introduction
1. Formed in 1985 2. Founder: Kenneth Lay 3. Merger of Houston Natural Gas and Inter north The first nationwide natural gas pipeline network in Houston, Texas 4. Enron was electricity , pulp and paper, water, natural gas and communications company 5. In December 1993, Enron inked a 20-year power-purchase contract with the Maharashtra State Electricity Board. 6. The contract allowed Enron to construct a massive 2,015 megawatt power plant. 7. By 1994 Enron became the largest Electricity Seller in US 8. Nations 7th Largest corporation 9. Largest contributor to the political campaign of George W Bush 10. 10 yrs to turn from 10-60 billion and 24 hrs to go to 0 11. From 1996 -2001 they were declared Americas most innovative company by Fortune Magazine 12. In August 2000 the value of stock went up to as high as 90$ per share 13. In 2001 Fortune Magazine included it in 100 Best Companies to work for in USA list.

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Scandal
1. In April 2001:
Enron reveals that it is owed more than five hundred million dollars by bankrupt California energy companies 2. In August 2001 Jeff skilling resigned as CEO 3. On the very next day the Stock price fall to $42 4. In Oct 2001, Enron reports a third quarter loss of $618 million. 5. In Oct 2001, stock fall to 15$ 6. In Nov, admitted accounting errors, inflating income by $586 million since 1997 7. In Dec. 2001 Enron filed for bankruptcy. 8. The share prices fell to $0.12 9. In 2002 Criminal Investigation was launched against the company

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Scandal
The appearance of company was totally Artificial

1. 2.

3. 4. 5.

Mark to market Accounting : booked revenues for future in any venture they entered in Special purpose entities/Structured Finance Companies like JEDI, RAPTOR CHEWCO Executive compensation Risk Management Auditing

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Impact
1. 2. 3. 4. 5. 6. 7. 8. 20,000 lost their jobs/Unemployment $2 billion of retirement fund and pension were lost Arthur Andersen bankruptcy Share holders lost 74$ billion Loss of investors confidence Stock Market Runs down GDP reduced/ National-local economy Estimates that spending on Sarbanes-Oxley will reach $5.8 billion in 2005 9. In November 2004 Enron emerged from its bankrupts and on September 2006 they sold Prisma Energy International Inc. their last business. 10. As of 2007 Enron changed it name to Enron Creditors Recovery Corporation.

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Key Players

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Verdict
1. Chairman: Ken lay Convicted : 10 counts Compensation: 42$ million dollar (1999 only) Sentence :45 yrs (he died in 2006 before being sentenced) 2. CEO: Jeff skilling Convicted : 19 counts Compensation: 132$ million dollar (2001 only) Sentence:24 yrs Charge: Insider trading, false statement, Conspiracies and security fraud Fine: 45$ m 3. CFO: Andrew Fastow Convicted : 2 counts Compensation: 132$ million dollar (2001 only) Sentence:10 yrs Fine: 24$ m Charge
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Must Watch and Read

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Introduction
1. 2. 3. 4. Calisto Tanzi started Parmalat in 1961 Italy's largest food company Italy's 8th largest industrial company One of the worlds largest Dairy and milk producer

5. By 2002, 8 billion in yearly sales with 36000 employees in 30 countries 6. Had many division like
Bakery Fresh Foods Milk Vegetables.

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Scandal
1. 2. 3. 4. 5. 6. 7. 8. Parmalats financial conditions started going down in 1980s In 1987 it spent 130 million in odeon TV which went down in just 3 years In 1990 Parmalat went public to fix its financial gaps. It had a market value of 300 million In 1993 Parmalat allegedly began to invent its financial transactions to pad balance sheet They started billing twice for the shipment of same merchandise in order to show increased Accounts receivable From 1990 -2003 they borrowed money from banks and showed inflated sales. They than made debt disappear by transferring to off self companies Transferred companies money to Tanzi family accounts
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Scandal
1. Fraudulently offered US$100 million worth of unsecured notes to U.S. investors in 2003, at the same time inflated its assets by at least US$5 billion 2. Parmalat has prosecutors scrambling to find out what happened to $8.5 billion to $12 billion in vanished assets. 3. Some 38% of Parmalat's assets were supposedly held in a $4.9 billion Bank of America (BAC) account of a Parmalat subsidiary in the Cayman Islands.

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Key Players
Calisto Tanzi- 18 years of imprisonment

Auditors Involved: Grant thorton and delloitte touche

Former chief financial officers Luciano Del Soldato & Fausto Tonna

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Introduction
1. British imperial chain of wireless stations 2. Founded by Gugliemo Marconi in 1897 3. It was british Political scandal that broke in 1912 4. Contract for the construction of a chain of wireless stations between English Marconi company and British govt was expected

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Scandal
1. Allegations of insider trading on Ministers 2. Key members involved

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Lloyd George the chancellor of Exchequer Herbert Samuel, Postmaster General Rufus Isaac, the Attorney General Godferry Isaac, Managing Director Lord Murray, Master of Ellibank
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Background
1. 2. 3. 4. 5. 6. 7. 8. 9. Huge telecommunications company Formed in 1983 Company began as Long Distance Discount Services Founder was Bernard Ebbers Largest in the U.S. Telecommunications giant From 1995 until 2000 worldcom purchased over 60 other telecom firms In 1997 it bought MCI for $37 billion Worldcom moved into Internet & Data Communication Handling

1. 50% of all united states internet traffic 2. 50% of all emails worldwide 10. By 2001 Worldcom Owned one-third of all data cables in the united states 11. Became second largest long distance carrier in 1998 & 2002

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How It Happened
1. The fraud was accomplished in two main ways. 2. First, WorldCom's accounting department underreported 'line costs' (expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them. 3. Second, the company inflated revenues with bogus accounting entries from corporate unallocated revenue accounts.
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Scandal
1. They classified over $3.8billion in payments for line costs as capital expenditures rather than current expenses. 2. Irregularities in the reserve accounts. 3. SEC claims that the total for fraudulent accounting comes to $9 billion dollars. 4. The company began to fall in 1999 with massive lay offs and the steady decline of its stock price. 5. Stock prices for WorldCom were around 60 dollars and dropped to pennies in 2002 giving sleepless nights to investors. 6. Business sector mergers were unsuccessful.
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The stock price had fallen from around 60$ in 1999 to $1 in 2002
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Government Involvement
1. Despite conspiracy charges and uncovered financial fraud the government still keeps WorldComs eligibility to file for bankruptcy. 2. The U.S. gives $2 billion dollars in assets to tap. 3. $20 million dollars over the span of three years given to new CEO 4. WorldCom still allowed to oversee government projects

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Impact
1. Overall investor distrust with companies undergoing similar problems. 2. National feeling that the stock market is not as safe as previously thought. 3. SEC forced to keep a closer look on auditor and accountant dealings.

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Post Fraud Happening

1. WorldCom was renamed MCI in 2004 when it emerged from bankruptcy.
2. Company could spin off several business units.

3. Added additional board members to serve on a special investigative panel to review accounting practices.
4. WorldCom may write off $50.6 billion in intangible assets.
5. WorldCom is trying to secure loans.17,000 jobs cut to

save $1 billion.
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Verdict
Executives and Accounting Staff 6 individuals convicted of fraud / conspiracy / false filings Ebbers CEO 25 years in prison Sullivan CFO 5 years in prison Myers Controller 1 year in prison Yates Dir of Acctg 1 year in prison Vinson Acctg Dept 5 months in prison Manager 5 months house arrest Normand Acctg Dept 3 years probation Manager Above 6 individuals agreed to pay a total of $24-34M to settle securities class action case
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Over all Conclusion

1) Unethical Business Practices
Security Scams Wrong financial Statements companies with 25,000 crores without starting business

2) Impact on Govt and economy

Low GDP Stock Market crashes Un employment

3) Impact on general public

Loose money Lower investments Lost jobs

4) Impact on Globalization
Over seas investors loose interest
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