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failures of Corporate Governance

failures of Corporate Governance

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Published by k gowtham kumar

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Published by: k gowtham kumar on Nov 27, 2010
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10/09/2013

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Reasons for Corporate Governance failures
Corporate governance
is the set of processes, customs, policies, laws, andinstitutions affecting the way a corporation is directed, administered or controlled. Corporategovernance also includes the relationships among the many stakeholders involved and thegoals for which the corporation is governed. The principal stakeholders are theshareholders, management, and the board of directors. Other stakeholders includelabor(employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators,and the community at large.
 
This article reveals various reasons for failure of Corporate Governance; CorporateGovernance consists of, various examples of Corporate Governance Failures like Enron,Satyam, Cadbury, Wal-Mart, Xerox and why Corporate Governance failed in such bigorganizations. Article also describes various mechanisms of Corporate Governance like (1)Company's Act (2) Security law (3) Discipline of capital market (4) Nominees on companyboard (5) Statutory audit (6) Codes of conduct etc. Some factors that influence theCorporate Governance like Ownership structure, Structure of company board, financialstructure, Institutional Environment etc. Various systematic problems in CorporateGovernance and Recent Corporate Governance failures.
 
K
ey words: Corporate Governance, Governance, Satyam, Enron, Wal-Mart,Mechanism,Polly Peck and ColorollCorporate governance
is a multi-faceted subject. An important theme of corporategovernance is to ensure the accountability of certain individuals in an organization throughmechanisms that try to reduce or eliminate the principal-agent problem. A related butseparate thread of discussions focuses on the impact of a corporate governance systemin economic efficiency, with a strong emphasis shareholders' welfare. There are yet otheraspects to the corporate governance subject, such as the stakeholder view and thecorporate governance models around the world.
 
There has been renewed interest in the corporate governance practices of moderncorporations since 2001, particularly due to the high-profile collapses of a number of largeU.S. firms such as Enron Corporation and Worldcom. In 2002, the U.S. federal governmentpassed the Sarbanes-Oxley Act, intending to restore public confidence in corporategovernance.
 
Factors influencing corporate governance
 
1.
The ownership structure
the structure of ownership of a company determines, to a considerable extent, how aCorporation is managed and controlled. The ownership structure can be dispersed amongindividual and institutional shareholders as in the US and UK or can be concentrated in thehands of a few large shareholders as in Germany and Japan. But the pattern of shareholdingis not as simple as the above statement seeks to convey. The pattern varies the across theglobe.Our corporate sector is characterized by the co-existence of state owned, private andmultinational Enterprises. The shares of these enterprises (except those belonging to a
 
public sector) are held by institutional as well as small investors. Specifically, the shares areheld by(1) The term-lending institutions(2) Institutional investors, comprising government-owned mutual funds, Unit Trust of Indiaand the government owned insurance corporations(3) Corporate bodies(4) Directors and their relatives and(5) Foreign investors. Apart from these block holdings, there is a sizable equity holding bysmall investors.
 
2
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The structure of company boards
Along with the structure of ownership, the structure of company boards has considerableinfluence on the way the companies are managed and controlled. The board of directors isresponsible for establishing corporate objectives, developing broad policies and selectingtop-level executives to carry out those objectives and policies.
 
3
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The financial structure
Along with the notion that the structure of ownership matters in corporate governance is thenotion that the financial structure of the company, that is proportion between debt andequity, has implications for the quality of governance.
 
4
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The institutional environment
The legal, regulatory, and political environment within which a company operatesdetermines in large measure the quality of corporate governance. In fact, corporategovernance mechanisms are economic and legal institutions and often the outcome of political decisions. For example, the extent to which shareholders can control themanagement depends on their voting right as defined in the Company Law, the extent towhich creditors will be able to exercise financial claims on a bankrupt unit will depend onbankruptcy laws and procedures etc.
 
echanisms of corporate governance
 
In our country, there are six mechanisms to ensure corporate governance:
 
(
1)
Companies Act
Companies in our country are regulated by the companies Act, 1956, as amended up todate. The companies Act is one of the biggest legislations with 658 sections and 14schedules. The arms of the Act are quite long and touch every aspect of a company'sinsistence. But to ensure corporate governance, the Act confers legal rights to shareholdersto(1) Vote on every resolution placed before an annual general meeting;(2) To elect directors who are responsible for specifying objectives and laying down policies;(3) Determine remuneration of directors and the CEO;(4) Removal of directors and(5) Take active part in the annual general meetings.
 
 
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Securities law
The primary securities law in our country is the SEBI Act. Since its setting up in 1992, theboard has taken a number of initiatives towards investor protection. One such initiative is tomandate information disclosure both in prospectus and in annual accounts. While thecompanies Act itself mandates certain standards of information disclosure, SEBI Act hasadded substantially to these requirements in an attempt to make these documents moremeaningful.
 
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Discipline of the capital market
Capital market itself has considerable impact on corporate governance. Here in lies the rolethe minority shareholders can play effectively. They can refuse to subscribe to the capital of a company in the primary market and in the secondary market; they can sell their shares,thus depressing the share prices. A depressed share price makes the company an attractivetakeover target.
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Nominees on company boards
Development banks hold large blocks of shares incompanies. These are equally big debt holders too. Being equity holders, these investorshave their nominees in the boards of companies. These nominees can effectively blockresolutions, which may be detrimental to their interests. Unfortunately, the role of nomineedirectors has been passive, as has been pointed out by several committees including theBhagwati Committee on takeovers and the Omkar Goswami committee on corporategovernance.
 
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Statutory audit
Statutory audit is yet another mechanism directed to ensure good corporate governance.Auditors are the conscious-keepers of shareholders, lenders and others who have financialstakes in companies.Auditing enhances the credibility of financial reports prepared by any enterprise. Theauditing process ensures that financial statements are accurate and complete, therebyenhancing their reliability and usefulness for making investment decisions.
 
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Codes of conduct
The mechanisms discussed till now are regulatory in approach. The are mandated by lawand violation of any provision invite penal action. But legal rules alone cannot ensure goodcorporate governance. What is needed is self-regulation on the part of directors, besides of course, the mandatory provisions.
 
Sy 
 stemic problems of corporate governance
 
y
 
Demand for information: A barrier to shareholders using good information is the costof processing it, especially to a small shareholder. The traditional answer to thisproblem is the efficient market hypothesis (in finance, the efficient markethypothesis (EMH) asserts that financial markets are efficient), which suggests thatthe shareholder will free ride on the judgments of larger professional investors.
y
 
Monitoring costs: In order to influence the directors, the shareholders must combinewith others to form a significant voting group which can pose a real threat of carrying resolutions or appointing directors at a general meeting.

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