Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company

) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, executives, employees, customers, creditors, suppliers, and the community at large. Corporate governance is a multi-faceted subject.[1] An important theme of corporate governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare. There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world

- 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, clientsA well-defined and enforced corporate governance provides a structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws. To that end, organizations have been formed at the regional, national, and global levels. 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 acts in the name of the enterprise. , and government

There has been a whiff of suspicion in the market since quite some time now leaving very little belief in corporate governance at the micro and macro level. So how much of these fears are real and how much of this is an over-reaction; Sandeep Parekh founder of Finsec Law Advisors and Ashvin Parekh partner and global leader of financial services at Ernst & Young discuss. Sandeep Parekh tells CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee that the focus on softer corporate governance issue is a positive sign as he sees huge improvement in reporting standards since the Satyam scam. However, he continues to feel that consent orders need more disclosures from regulators. "Also, accountability in public sector undertakings is quite low," he adds.

. we don’t know whether there was some misrepresentation in the accounts. but still scam as big as that happened. How sanguine are Indian income statements. accounting irregularities have been overblown due to rumours. they had pretty much all the tickbox items checked.Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ    See latest News about Reliance Natura See previous management interviews See what other Experts & Brokerages are saying about Reliance Natura However. people will assume that the worst has happened. since then to now though. people have drawn adverse inference. People have said that look. we are going to assume that you have done something drastically bad. we are seeing in the Reliance case. I think it is a good sign from the investors’ perspective and the markets perspective. I don’t think we have come a long way. So. according to Ashvin Parekh of E&Y. if you don’t tell us what is wrong with you. So. which is the basis on which global investors invest in stocks in India? S Parekh: I think they are becoming a lot more skeptical which is probably a good sign as investors. but looking at softer issues such as what wrong have you done. we just know that SEBI has passed a consent order. We are taking softer issues into account rather than just big picture fraud and major problem areas. Q: The last time this issue was top of mind was post the Satyam scam. it is becoming a lot more sophisticated. It is not just looking at independent directors and the numbers of independent directors. last few days we have had a SEBI order against one of the country’s largest groups suggesting that some part of their numbers were falsely added to. I would see it as a positive that people are taking notice of smaller things including therefore the fact that the Reliance order we don’t know any facts. given that and people have kind of taken that with the kind of fistful of salt. Below is a verbatim transcript of their interview with CNBC-TV18'sUdayan Mukherjee and Mitali Mukherjee. So. Satyam. So. had met all the checkbox requirements of corporate governance. Unless you tell us. I think. Also watch the accompanying videos. so I would say that I would see that as a positive sign that we becoming a lot more sophisticated. I think consent order where there is very little information. They had marquee independent directors. in which they have asked for auditor rotation. do you think any headway has been made on this basic issue of reporting accounting standards and that being checked adequately? S Parekh: I think we have come some way. Compared to that. Q: At a micro level. We have had an issue where these Comptroller and Auditor General (CAG) has pulled up a large public sector company BEML saying they overstated sales. majority of them independent big for audit company. So.

for example. So. But coming back to financial reporting. for example. or the partners who are associated with a certain audit very regularly. for example. S Parekh: Yes. that is being talked about of the auditors. By merely changing the firms. 2009 in India Knowledge@Wharton . well experienced to be in a position to examine that. they are specific. The fact is that it is not a penalty. which has been sought by SEBI. this is one of the important aspects. within the same firm then that could be one of the approaches that can be taken in regards the change of the rotation of the auditors. those seems quite specific in terms of allegations. the whole process has to be well understood in regards what is going to come out of this rotation that is being talked about. How really do you want to implement that rotation. are we accepting the principle. Can you just take us through what is going on between large companies and auditors and whether there is probably the suggestion of some kind of pressure being borne on them to misrepresent facts or to overlook facts? A Parekh: There are two parts to it. infact vast majority of the valuation is not connected to misrepresentation in the financial reporting. which works very closely with the management and with the boards of these corporate bodies. a lot more skeptically than they would have taken it five years back. I think there is very little information. they have all these very stringent penalty or settlement charges and bar from the market etc. the auditors themselves should be well trained. So. which we just mentioned. for example. Q: There is talk of auditor rotation in some of these group companies. There are specific sectors like insurance. So. One is this rotation. There is a good debate in the Indian context in terms of saying the auditors and the ability of the auditors to examine the business risk associated with various businesses. It is something to do with foreign exchange and round-tripping which again nobody knows because the consent order is quite salience. Scandal at Satyam: Truth. I think it is good that people are taking those one-and-a-half to two lines. which has been imposed. Lies and Corporate Governance Published: January 09. what you are doing is you are asking someone to look at them completely afresh. In two to two and a half pages.Q: In that SEBI consent order. what are the various aspects of that rotation? The approach that can be taken perhaps is that if you change the audit team. There are some unconfirmed reports that some auditors have approached the government saying that you must protect us because we are being coerced. Reliance Infra misrepresented investments in yield management certificates and misrepresented profit and loss accounts. but that is all they say. So. particularly in those areas where the business risks are higher. They don’t specify exactly what happened behind the scenes. Somewhere along we will have to take a view in regard saying. It is very important that the regulators. there are mentions of things like RNRL. which has been doing rounds for a little while. there are pros and cons associated with both the types of rotations which are being talked about. should that be changed or should the firm itself be changed. the principle being that the team associated with the audit. what you are doing is in the process is that the knowledge and the evidence that the auditors would have collected on the corporate working in various different areas. will you not agree that a good understanding of the actuarial working and valuations is very critical for any auditor who is going to take up let us say complex sectors such as those.

S. India's fourth-largest IT services firm." In one of the the biggest frauds in India's corporate history. but Raju's admission -. Satyam's chief financial officer. The board hurriedly reconvened the same day and called off the proposed investment. 'Riding a Tiger' Raju was compelled to admit to the fraud following an aborted attempt to have Satyam invest $1. B.two firms promoted and controlled by his family members. clients and employees a steady diet of asatyam (or untruth). it had engaged Merrill Lynch to explore "strategic options. .and the government of India disbanded Satyam's board. however. at least regarding its financial performance.in fact.S. it is unclear how much money investors will be able to recover. In a press conference held in Hyderabad on January 8. and whether other companies could follow Satyam's Raju in revealing skeletons in their own closets. Ironically." That tragedy has been succeeded by another that has been dubbed "India's Enron.it has not offered Satyam any funds. On December 16. who pummeled its stock on the New York Stock Exchange and Nasdaq.shows the company had been feeding investors. Another possible impact could be on the trend of outsourcing to India. founder and CEO of Satyam Computers. Though control of the company will pass into the hands of a new board. international regulators could swing into action if they believe U. overstating revenues and inflating profits by $1 billion. and the appointment of Ram Mynampati as the interim CEO. Since Satyam's stocks or American Depository Receipts (ADRs) are listed on the Bombay Stock Exchange as well as the New York Stock Exchange. effectively hollowing out Satyam. Mynampati told reporters that the company's cash position was "not encouraging" and that "our only aim at this time is to ensure that the business continues. announced on January 7 that his company had been falsifying its accounts for years. has begun an investigation into the fraud. Ramalinga Raju. media reports noted that Raju and his brother Rama (also a Satyam co-founder) had been arrested -.accompanied by his resignation -. According to experts from Wharton and elsewhere. since India's IT firms handle sensitive financial information for some of the world's largest enterprises. the media called it "India's 9/11." A day later. (Editor's note: Satyam is a corporate sponsor of India Knolwedge@Wharton.6 billion in Maytas Properties and Maytas Infrastructure ("Maytas" is Satyam spelled backwards) -." but the investment bank has withdrawn following the disclosure about the fraud. but given the company's precarious finances. It is widely believed that rivals such as HCL. Satyam means "truth" in Sanskrit. The possible disappearance of a top IT services and outsourcing giant will reshape India's IT landscape.When terrorists attacked Mumbai last November. sparking a negative reaction by investors. Meanwhile. laws have been broken. the government stopped short of a bailout -.) Raju's departure was followed by the resignation of Srinivas Vadlamani. will be asked about corporate governance in India. At least two U. shareholders. law firms have filed class-action lawsuits against Satyam. The most significant questions. the Satyam debacle will have an enormous impact on India's business scene over the coming months. which regulates Indian public companies. Satyam could possibly be sold -. Satyam's board cleared the investment. a team of auditors from the Securities and Exchange Board of India (SEBI). Wipro and TCS could cherry pick the best clients and employees.

544 ($11. 7.. Satyam's auditor PricewaterhouseCoopers issued a terse statement: "Over the last two days. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others. Raju said in a letter addressed to his board. On January 8. mean that we are far from seeing the end of the controversy surrounding Satyam Computers. Given our obligations for client confidentiality. It had also inflated its 2008 second quarter revenues by Rs. accrued interest and misstatements. it would make international investors more wary. as Raju may have hoped. not knowing how to get off without being eaten. a management consultant and advisor to Harvard's Kennedy School of Government. He took sole responsibility for those acts. and actual operating margins were less than a tenth of the stated Rs.Mangalam Srinivasan. called the "father of the Pentium chip" and now executive managing director of NEA Indo-US Ventures in Santa Clara. he resigned his position as the ISB dean.35) last May.700 crore ($563 million). several . there have been media reports with regard to alleged irregularities in the accounts of Satyam. the stock exchanges and the market regulator Securities & Exchange Board of India (SEBI) that Satyam's profits were inflated over several years to "unmanageable proportions" and that it was forced to carry more assets and resources than its real operations justified. Raju acknowledged that Satyam's balance sheet included Rs. My continued concern and preoccupation with the evolving situation are impacting my role as dean of ISB at a critical time for the school. In the next 48 hours. Satyam's shareholders took a direct hit as the company's share price crashed 77% to Rs. Immediately following Raju's confession. a far cry from its 52-week high of Rs. Rao had chaired both December 16 board meetings. yesterday's shocking revelations. 649 crore ($135 million). it is not possible for us to comment upon the alleged irregularities. "It was like riding a tiger. "The aborted Maytas acquisition was the last attempt to fill the fictitious assets with real ones. resignations streamed in from Satyam's non-executive director and Harvard professor of business administration Krishna Palepu and three independent directors -. Price Waterhouse are the statutory auditors of Satyam.. of which I had absolutely no prior knowledge. "If there were one or two more such accounting scandals in the next six months. 30 (approximately 60 cents). he explained: "Unfortunately." he said.5 billion) in non-existent cash and bank balances. "One example would put people on guard." Impact on 'Brand India' The outrage over Raju's admission of systematic accounting fraud has broadened to wider concern about the potential damage to India's appeal for foreign investors and the IT services industry in particular.. Rammohan Rao." says Wharton management professor Michael Useem.. The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given that my term with ISB anyway ends in a few months. 2.The matter didn't die there.136 crore (nearly $1. In a letter to the ISB community. 588 crore ($122 million) to Rs. and M." Resigning as Satyam's chairman and CEO. I think that this is an appropriate time for me to step down." Specifically. the dean of the Indian School of Business in Hyderabad (ISB). Calif. Vinod Dham.

you are unable to hide the financial reality of how much cash you actually have. And that may not be a bad thing. 40% or 50%. because of a potential "flight to quality" among client companies. On the day that Raju ." Singh says. "Satyam was doing it by boosting sales and profits." he says. company management. and that investors need not worry about Indian corporate governance and accounting standards." (U. believes Satyam is an "outlier" and that there is no reason to think that "problems of this kind may be much more extensive than one company or a handful of companies. it is possible to paper over things. senior fellow at the Mack Center for Technological Innovation at Wharton. said in a statement that the Satyam development is "a major eye opener and will bring into renewed and critical focus the role of independent directors. "Don't assume other firms are guilty. Corporate India has tried to contain the damage so far. Basel II or other financial regulations?" Aron recommends that before other IT companies get blackballed because of Satyam's problems. financier Madoff last month admitted to running a $50 billion Ponzi scheme to keep his hedge fund afloat. and they should ensure that they do not face any spillover effect." he says." Useem also warns against overreacting. founder of RSM Astute Consulting Group." Suresh Surana. he adds. more scandals will come to light. "Clients could begin to ask. But he considers the situation to be an "alerting call" for investors to check where their money is.S. "foreign investors will look a little more askance at accounting data from India. auditors. Sarbanes Oxley. called upon regulators "to move quickly to demonstrate that this is an exceptional case among corporations. 'How much do I know about this IT company and its governance?'" says Aron. Rajeev Chandrasekhar." Indian IT companies have always had exceptionally high standards of accounting. "they should act swiftly to demonstrate that their own operations are squeaky clean. When growth rates slow down. he adds. This has already begun to happen. "The third-tier and weaker companies will probably undergo a lot more scrutiny." However. [the] CFO and other key persons involved. Bernie Madoff was doing it by boosting rates of return.examples would be enough to tell big investment money managers that they have to be especially careful working in that environment. According to Ravi Aron. the Satyam fallout could affect India's IT offshoring and outsourcing firms in several ways. and for auditors and independent directors in all major firms to take a look at the books. An immediate impact could be skepticism on the part of clients about whether Indian IT firms can be entrusted with sensitive financial information. "Is the IT service provider doing anything that could jeopardize the client's compliance with FASB." Jitendra Singh. president of the Federation of Indian Chambers of Commerce and Industry." "When you have companies that are ostensibly growing their top lines at 30%.) Singh adds that companies with "the bluest of blue-chip reputations [such as] Infosys and TCS" could actually gain in the current environment. a Wharton management professor who is currently dean of the Nanyang Business School in Singapore. It is possible that during this slowdown period.

"This is a serious lapse on their part." NASSCOM." the letter added that Nayar would "reaffirm our commitment that we [will] focus on creating value for our customers with the same passion that we have demonstrated in the past while maintaining the highest ethical and governance standards. N." The involvement of the board." he says. "Satyam always wanted to keep up with the Big Three of Indian IT companies -. that India has several well-regarded IT companies.it is neither everyone's darling nor the plague." Saikat Chaudhuri." he adds. who signed off on the bogus accounts at Satyam. CEO of HCL. it was easy for Satyam to argue that the company was doing well and that it had good governance. though. It shows that investing in emerging markets is risky. If the IT sector in India continues to remain competitive. but India Inc. have a lot more to answer for than the board of directors. chief mentor at Infosys. If the sector becomes uncompetitive. they may have to answer a few more questions. believes that Indian business has an advantage in arguing that the problem is limited to Satyam and is not systemic.came clean. "If one or two of them don't make the grade." he says. "Honesty and transparency will alleviate investor concerns. a management professor at Wharton. e-mailed a personal letter to the company's clients and associates. but still had such serious governance problems makes this case particularly disturbing. . Vineet Nayar. in companies like Satyam. Similarly." Chaudhuri's advice to other Indian IT firms is to distance themselves from the Satyam fallout through prompt action. believes the Satyam episode reveals that the pressure on companies to maintain their financial performance is immense. "At a time when the IT industry was booming and companies were growing rapidly. is an isolated instance.S. the Satyam episode will just be a footnote in India's business story. The literature shows that is the reason they want to list in the U." Guillen notes that what makes Satyam's case unusual is that it had listed its ADRs on the NYSE. a Wharton management professor who has studied corporate governance in emerging economies. was on Indian television -. it should not shake investor confidence." Guillen adds.TCS. Perhaps Indian IT companies will face more scrutiny in the coming months. auditors such as PricewaterhouseCoopers. "Companies in emerging economies have trouble raising capital at low costs.distancing Infosys and the rest of the IT industry from Satyam's practices. "This works to the country's advantage because it deflects the blame of such occurrences to the way governance works in emerging economies rather than to India. Describing Satyam's disclosures as "unfortunate. it is the owner/promoter/founder who runs the show. Investors always balance risks and rewards. could play a role in helping communicate that "the Satyam episode. The proper response is to deal with and defuse the problem as soon as possible. They should have probed. was at the "strategic level. The fact that Satyam listed its ADRs in the U.. though it shocked everyone." In Chaudhuri's view." he notes. "I don't believe the sector will come crashing down. where they accept a higher level of governance in order to raise capital at a lower cost. Narayana Murthy. the National Association of Software and Services Companies. will pull through. What regulators in India need to do in response to Satyam is to find out quickly if other companies have been doing similar things. "India is not perceived like Russia -. R." Mauro Guillen. It has to do with the ownership structure. then that would create a serious problem. Chaudhuri adds.S. Infosys and Wipro.

. I would have to rely on what the management was presenting to me. Useem notes. a publicly held company in the U. where he was an independent director from 2000 to 2003.not as an ADR -. of forcing himself to be disciplined in the governance policies his company pursues. Tyco is one of the best examples of a corporate governance turnaround. the CEO and the CFO were knowingly taking money from the company for personal purposes.V. Again Useem says that if one were to take an inference from recent high-profile scandals outside of India. Mohandas Pai. "there would be a redoubled effort [in India] on the part of investors and independent directors at other companies to ensure that nothing like what happened at Satyam happens under their noses. of the group dynamics within the board. "Satyam's disaster has a parallel to these acts of malfeasance. He recalls working as a consultant a couple of years ago with Tyco. "At WorldCom." he says. The knowledge available to independent directors and even audit committee members is inherently limited to prevent willful withholding of crucial information. the Satyam episode has brought into sharp relief the role and efficacy of independent directors. "The issue is really more one of leadership at the board level." If it survives. that filed for bankruptcy last year. "There is no need to strengthen corporate governance regulations [in India]. even as an audit committee member or as an independent director." Useem recalls the CEO and promoter of a Chinese solar panel company who "wanted his company to be extremely well governed" and therefore listed it on the New York Stock Exchange." he says. Satyam may be able to redeem itself with new management and governance codes. at the end of the day." Truth in Numbers Notwithstanding Raju's confession. rather than at Enron. where the company's new CEO Ed Breen systematically went about cleaning up after the departure of disgraced CEO Dennis Kozlowski. Singh adds that the Satyam scandal doesn't necessarily warrant more regulation." Useem draws a parallel between what occurred at Satyam with the scandals at WorldCom and Tyco.." Singh says he drew "a level of confidence" from the accounting rigor and governance mechanisms at Infosys. drawing upon his experience as an independent director and audit committee member at Fedders." he says. "The reality is. instituting strong corporate governance practices. the CFO and the CEO were knowingly misstating the accounting and financials of the firm.for the sole purpose . He recalls how T.WorldCom and Tyco. "He wanted a great board of directors and thus listed the company fully on the NYSE -. SEBI requires Indian publicly held companies to ensure that independent directors make up at least half their board strength. the company's then-chief financial officer (now a .S. Singh notes. it's much more a matter of culture within the board room. at Tyco. Useem says. "It is the auditors' job to see if the numbers presented are accurate. The tone gets set by the chairman of the board.

everything we know about unrelated diversification [deals] from management literature is that. they are not a good idea.6 billion in real estate at a time when a competitor as formidable as HCL was gunning for one of its most lucrative markets. face the problem and solve the problem. the matter was allowed to slide. "The leadership dictum is that you need to stay the course. like the dog that didn't bark in the Sherlock Holmes story. "IT is a highly capital-intensive business. How effective independent directors can be is mainly a factor of the "dynamics inside the board room once the doors are closed. under Indian law. According to Aron. they don't seem to make strategic sense. some red flags should have been obvious. I was ." Media reports quoted former independent director Srinivasan as saying she accepted "moral responsibility" for failing to cast a dissenting vote on the Maytas proposal.director overseeing human resources) "would take so much time going into accounting details. "Given the fact that there is a family connection involved.6 billion in real estate at a time when competition with HCL was about to grow more intense? That is what the directors should have been asking. (Editor's note: See interview with HCL CEO Vineet Nayar. as an independent board member I would be looking very hard at whether this is the right decision for the company. "What on earth would compel Satyam to invest $1." he says. "There is an attitude in some Indian companies that the board members actually work for the people who have brought them onto the board. an SAP consulting firm. Some of the other directors who resigned have cited difficulties in attending frequent board meetings.. at a cost of $800 million. he adds." Instead.) Aron notes that any Satyam director should have been puzzled that the company was proposing to invest $1.. especially in India. quite aside from issues of governance." he says. In an effort to compete against Satyam. Satyam's former nonexecutive director." Even if outside directors were unaware of the true state of Satyam's finances. stated that he was not present at the board meetings where the Maytas investment proposals were discussed. Useem says it can indeed prove challenging for independent directors to go through reams of documents and attend frequent board meetings that companies in distress typically have. "As a result." according to Singh.. Palepu." Independent Defectors Useem wonders if the Satyam directors who resigned actually did the right thing. It looks like this may have been a problem at Satyam. as a general matter. Satyam is one of the world's largest implementers of SAP systems. "Also." says Aron. Singh notes that he would have expected the independent directors to be extra careful. The real strength of a healthy board is when a consensus gets overturned by a dissenting view. stay in the game. HCL recently acquired Axon. In a written response to Knowledge@Wharton. staying on the board and changing governance?" Useem adds that "it is often very hard to stay the course. "Did the four directors who resigned have an option of banding together. I am empathetic with people who have difficulty [making that decision]. This is a completely misguided attitude." Even if the proposed investment in the two Maytas firms appeared to be ethical on first sight.

Palepu earned nearly Rs. 1 crore (about $200. "At Enron. while whistle-blowers came out with the truth. and India's IT industry. the company." Chaudhuri points to a major difference between Enron and Satyam." In that sense." He declined comment. Raju did -ultimately -." he says. by then it was much too late.not eligible to vote on the proposals." he said. the company's head of media relations. 25 crore and imprisonment of up to 10 years to directors and management executives "for violating the listing agreement by making false and inaccurate disclosures in the company's quarterly and annual results. the people who will be left holding the bag will be the shareholders. according to Archana Muthappa. The CEO blew the whistle on himself. but those services were essentially leadership development and consulting for Satyam's top management. Unfortunately for him. according to regulatory filings. Citing the Indian Securities Contract Regulation Act of 1956." Singh says it is important to remember who the ultimate victims are in cases like Satyam. "At Satyam. SEBI and India's registrar of companies have launched an investigation into Satyam. there were no whistle-blowers.tell the truth and perhaps live up to the "Satyam" name. most of it for rendering "professional services. ." Even as Raju is widely blamed for unleashing "India's Enron. the CEO stonewalled. a report in The Economic Times says SEBI is empowered to award penalties of up to Rs.000) from Satyam in 2007. "This is a real tragedy.

Sign up to vote on this title
UsefulNot useful