corporate governance versus satyam scam- november 21, 2009

8/3/2019 Corporate Governance Versus Satyam Scam- November 21, 2009

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The Institute of CompanyThe Institute of Company

Secretaries of IndiaSecretaries of India

9393rdrd SMTP BatchSMTP Batch

Corporate Governance v/s Satyam ScamCorporate Governance v/s Satyam Scam

November 21, 2009November 21, 2009

ByBy

Ram MallarRam MallarM/s. R R Mallar & AssociatesM/s. R R Mallar & Associates

Email:Email: [email protected]@vsnl.net

www.mallarlaw.comwww.mallarlaw.com


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ContentContent

WhatWhat isis SatyamSatyam Scam?Scam?WhatWhat isis CorporateCorporate Governance?Governance?

WhatWhat isis BusinessBusiness Ethics?Ethics?

WhatWhat areare thethe safeguardssafeguards wewe havehave inin thethe CodeCodeofof CorporateCorporate GovernanceGovernance toto prevent prevent suchsuchscam?scam?

ReasonsReasons forfor failurefailure ofof CorporateCorporate GovernanceGovernanceinin SatyamSatyam..

SuggestedSuggested RemediesRemedies..


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Satyam ScamSatyam Scam Indias EnronIndias Enron

WhatWhat happenedhappened inin EnronEnron inin USA?USA?

EnronEnron corporationcorporation collapsedcollapsed inin 20012001..

OnlyOnly 11//33rdrd ofof AmericansAmericans feltfelt thatthat largelarge companiescompanies hadhad

anyany ethicalethical businessbusiness practicespractices.. OnlyOnly 2626%% believedbelieved thatthat theythey areare straightstraight forwardforward andand

honesthonest toto thethe consumersconsumers andand employeesemployees..

ParkingParking liabilitiesliabilities offoff BalanceBalance--Sheet,Sheet, fudgingfudging

Accounts,Accounts, stockstock promoting,promoting, bloatedbloated executiveexecutive paypaypackages,packages, massivemassive stockstock optionoption grants,grants , werewere somesome ofofthethe malpracticesmalpractices indulgedindulged inin byby EnronEnron..


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Whathappenedin Satyam?Whathappenedin Satyam?

InIn DecemberDecember 20082008,, wewe diddid betterbetter inin SatyamSatyam thanthan thetheEnronEnron..

ItsIts IndiasIndias EnronEnron ofof moremore thanthan RsRs.. 70007000 crorescrores fraudfraud..

FalsificationFalsification ofof AccountsAccounts uptoupto RsRs.. 70007000 crorescrores

FraudulentFraudulent diversiondiversion ofof FundsFunds

MoneyMoney LaunderingLaundering

ForeignForeign ExchangeExchange ManipulationsManipulations

InsiderInsider tradingtrading

CriminalCriminal BreachBreach ofof TrustTrust ITIT violationviolation


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Whathappenedin Satyam?Whathappenedin Satyam? ContdContd

RoundRound trippingtripping ofof illill--gottengotten wealthwealth MoreMore thanthan 1010,,000000 fictitiousfictitious EmployeesEmployees createdcreated..

327327 frontfront companiescompanies floatedfloated byby RajuRaju FamilyFamily toto securesecureloansloans forfor thethe PromoterPromoter familyfamily..

TheyThey borrowedborrowed RsRs.. 15001500 CroresCrores fromfrom FinancialFinancialInstitutions,Institutions, 3636 companiescompanies claimedclaimed thatthat theythey hadhad lentlent RsRs..12301230 CroresCrores toto SatyamSatyam andand notnot claimedclaimed backback..

RajuRaju statesstates thatthat hehe hadhad understatedunderstated liabilitiesliabilities andandoverstatedoverstated debtorsdebtors..

CorporatisedCorporatised familyfamily holdingsholdings asas SRSRSRSR HoldingsHoldings LimitedLimitedwhichwhich pledgedpledged thethe sharesshares..

RajuRaju forgedforged FixedFixed DepositDeposit ReceiptsReceipts toto showshow balancebalance thatthatareare notnot existingexisting..


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SeriousSerious FraudFraud InvestigationInvestigation OfficeOffice (SFIO)(SFIO)investigatinginvestigating thethe mattermatter..

ClassClass ActionAction SuitSuit inin NewNew YorkYork inin USAUSA DistrictDistrictCourtCourt againstagainst PWC,PWC, forfor recklesslyrecklessly disregardingdisregardingmultimulti--layerlayer massivemassive fraudfraud byby formerformer managementmanagementofof SatyamSatyam..

AlsoAlso againstagainst Satyam,Satyam, RamalingamRamalingam Raju,Raju, hishisbrotherbrother andand PWCPWC byby purchaserspurchasers ofof ADRADR..


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RajuRaju inin hishis 55 pagepage letterletter admittedadmitted yearsyears ofof

financialfinancial deception,deception, thatthat salessales andand profitsprofits werewere

inflatedinflated ,, thatthat SatyamSatyam diddid notnot actuallyactually havehave thethe

bulkbulk ofof RsRs.. 55,,300300 crorescrores cashcash whichwhich itit saidsaid itit did,did,

thatthat liabilitiesliabilities totalingtotaling RsRs.. 12301230 crorescrores werewere

understatedunderstated..

ReceivablesReceivables areare lessless thanthan earlierearlier statedstated byby atleastatleast

RsRs.. 70007000 crorescrores inin thethe CompaniesCompanies booksbooks..


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SatyamSatyam chairmanchairman andand hishis brotherbrother areare alreadyalreadyarrestedarrested forfor nonnon--bailablebailable offencesoffences underunder IPC,IPC,includingincluding criminalcriminal breachbreach ofof trust,trust, criminalcriminal

conspiracy,conspiracy, cheatingcheating andand forgeryforgery forfor fudgingfudgingSatyamSatyam AccountsAccounts andand misrepresentingmisrepresenting factsfactswhichwhich couldcould putput themthem behindbehind barsbars forfor yearsyears..


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Effectof Scam in Stock Market:Effectof Scam in Stock Market:

Satyam stock price per shareSatyam stock price per share

In May 2008In May 2008 Rs. 500.00Rs. 500.00

In December 2008In December 2008 Rs. 265.00Rs. 265.00 After collapseAfter collapse Rs. 11.50Rs. 11.50

Later recovered inLater recovered in

February 2009February 2009 Rs. 50.00Rs. 50.00


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Whatis Corporate Governance?Whatis Corporate Governance?

ItIt isis aa setset ofof MethodsMethods / / PracticesPractices byby whichwhichbusinessbusiness isis carriedcarried on,on, directeddirected andand controlledcontrolledinin aa corporatecorporate formform ofof businessbusiness organizationorganization

forfor promotionpromotion andand protectionprotection ofof interestinterest ofofvariousvarious stakeholdersstakeholders whichwhich shouldshould bebe::

FairFair toto allall stakeholdersstakeholders

TransparentTransparent andand

MakeMake BoardBoard ofof Directors/Directors/ManagementManagement

accountableaccountable..


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Aims andObjectives of GoodAims andObjectives of GoodCorporate GovernanceCorporate Governance

EnhancementoflongEnhancementoflong--term shareholdervalue,term shareholdervalue,andand

To protectinterests ofother stakeTo protectinterests ofother stake--holders like:holders like:(a)(a) Customers (b) Suppliers (c) CreditorsCustomers (b) Suppliers (c) Creditors

(d)(d) Depositors (e) Employees Depositors (e) Employees

(f) Government, (g) Society and(f) Government, (g) Society and

(h) Environment(h) Environment


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What is Business Ethics?What is Business Ethics? ItIt isis thethe studystudy ofof whatwhat isis goodgood && bad,bad, rightright

&& wrong,wrong, justjust && unjust,unjust, fairfair && unfairunfair forfor

thethe businessbusiness..

CodeCode ofof ConductConduct forfor businessmanbusinessman forfor

carryingcarrying onon businessbusiness consistentconsistent withwith whatwhat

othersothers followfollow..

DifferentDifferent fromfrom PersonalPersonal Ethics,Ethics, whichwhich isis

basedbased onon whatwhat hehe considersconsiders goodgood andand badbad

forfor hishis personalpersonal lifelife..


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Objectives ofBusiness EthicsObjectives ofBusiness Ethics CheckCheck malpracticesmalpractices -- rapidrapid businessbusiness growthgrowth

threwthrew upup manymany unethicalunethical practicespractices lustlust forfor

moneymoney andand economiceconomic powerpower breadedbreaded manymany

evils,evils, whichwhich harmedharmed societysociety..

PreventPrevent exploitationexploitation ofof market,market, societysociety andand

consumersconsumers..

DriveDrive homehome socialsocial responsibilityresponsibility toto gaingain

confidenceconfidence ofof consumerconsumer thethe KingKing inincompetitioncompetition..

ForgeForge cordialcordial relationrelation withwith thethe societysociety..


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CodifiedCorporate GovernanceCodifiedCorporate Governance

SafeguardsSafeguards

WhatWhat areare thethe safeguardssafeguards wewe havehave inin thethe CodeCode ofofCorporateCorporate GovernanceGovernance toto preventprevent corporatecorporate fraudfraudinin CompaniesCompanies ActAct andand clauseclause 4949 ofof thethe ListingListingAgreement?Agreement?

TheThe BoardBoard isis responsibleresponsible forfor thethe effectivenesseffectiveness ofof

thethe ongoingongoing systemsystem ofof internalinternal controlcontrol includingincludingminimizingminimizing riskrisk ofof fraudfraud andand reportreport thethe samesame totothethe shareholdersshareholders..


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SafeguardsSafeguards ContdContd

TheThe shareholdersshareholders areare entitledentitled toto askask whywhy waswas aawealthwealth destroyingdestroying eventevent notnot anticipatedanticipated andand actedacteduponupon byby thethe managementmanagement..

CredibilityCredibility andand TrustTrust isis everythingeverything inin businessbusinessbecausebecause ofof SatyamSatyam thatthat trusttrust hashas evaporatedevaporated..

SatyamSatyam byby theirtheir moneymoney powerpower influencedinfluenced thethe

guardiansguardians ofof corporatecorporate governance,governance, thethe impressionimpressionisis thatthat SatyamSatyam paidpaid thethe copcop onon hishis beatbeat toto taketake aanapnap..


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CompositionofBoardofDirectorsCompositionofBoardofDirectors

TheThe BoardBoard shouldshould comprisecomprise 5050%% IndependentIndependentDirectorsDirectors ifif thethe BoardBoard hashas executiveexecutive chairmanchairman likelikeSatyamSatyam..

IndependentIndependent DirectorDirector isis thethe oneone whowho doesdoes notnot

havehave anyany materialmaterial pecuniarypecuniary relationshiprelationship withwiththethe companycompany..

IndependentIndependent DirectorsDirectors requiredrequired toto reviewreviewperiodicallyperiodically legallegal compliancecompliance reportsreports andand alsoalso

detaileddetailed prescribedprescribed financialfinancial informationinformationincludingincluding investmentsinvestments inin subsidiariessubsidiaries oror otherotherbodybody corporatecorporate..


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BoardofDirectorsBoardofDirectors ContdContd

ItIt isis obligatoryobligatory onon thethe BoardBoard toto laylay downdown CodeCode ofof

ConductConduct forfor allall BoardBoard MembersMembers andand ManagementManagement

whichwhich isis toto bebe postedposted onon thethe websitewebsite ofof thethe

companycompany andand theythey shouldshould affirmaffirm compliancecompliance inin thethe

AnnualAnnual ReportReport..

TheThe termterm ofof officeoffice ofof NonNon--executiveexecutive DirectorsDirectors isis

maximummaximum ofof 99 yearsyears..


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Audit committeeoftheBoardAudit committeeoftheBoard

CompositionComposition::

AllAll thethe membersmembers toto bebe NonNon--executiveexecutive DirectorsDirectorswithwith aa majoritymajority ofof independentindependent DirectorDirector withwith atatleastleast oneone membermember:: Financial/Financial/ managementmanagement expert,expert,

ChairmanChairman toto bebe independentindependent DirectorDirector toto bebepresentpresent atat AGMAGM..

MeetMeet atleastatleast thricethrice aa year,year, onceonce beforebefore finalizationfinalizationofof AnnualAnnual AccountsAccounts..

QuorumQuorum:: minimumminimum 22 IndependentIndependent DirectorsDirectors..


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AuditAudit CommitteeCommittee ContdContd....

PowerPower ofof AuditAudit CommitteeCommittee

PowerPower ofof AuditAudit CommitteeCommittee toto investigateinvestigate anyany

activity,activity, seekseek informationinformation fromfrom anyany employee,employee, seekseek

outsideoutside professionalprofessional // legallegal adviceadvice ,, securesecure

attendanceattendance ofof outsidersoutsiders withwith relevantrelevant expertiseexpertise ifif

requiredrequired..


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AuditAudit CommitteeCommittee ContdContd....

RoleRole ofof AuditAudit committeecommittee includesincludes thethefollowingfollowing::

11.. OversightOversight ofof thethe company'scompany's financialfinancial reportingreporting

processprocess andand thethe disclosuredisclosure ofof itsits financialfinancial

informationinformation toto ensureensure thatthat thethe financialfinancial statementstatementisis correct,correct, sufficientsufficient andand crediblecredible..

22.. RecommendingRecommending thethe appointmentappointment andand removalremoval ofof

externalexternal auditor,auditor, fixationfixation ofof auditaudit feefee andand alsoalso

approvalapproval forfor paymentpayment forfor anyany otherother servicesservices..


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Role of Audit committeeRole of Audit committee

contd..contd..

33.. ReviewingReviewing withwith ManagementManagement thethe annualannual

financialfinancial statementsstatements beforebefore submissionsubmission toto

thethe BoardBoard..

44.. ReviewingReviewing withwith thethe Management,Management, externalexternal

andand internalinternal auditors,auditors, thethe adequacyadequacy ofofinternalinternal controlcontrol systemssystems..


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Role of Audit committeeRole of Audit committee contd..contd..

55.. ReviewingReviewing thethe adequacyadequacy ofof internalinternal auditaudit functionfunction..

66.. DiscussionDiscussion withwith internalinternal auditorsauditors anyany significantsignificantfindingsfindings andand followfollow upup thereonthereon..

77.. ReviewingReviewing thethe findingsfindings ofof anyany internalinternal

investigationsinvestigations byby thethe internalinternal auditorsauditors intointomattersmatters wherewhere therethere isis suspectedsuspected fraudfraud ororirregularityirregularity..

88.. DiscussionDiscussion withwith externalexternal auditorsauditors beforebefore thethe auditaudit

commencescommences aboutabout naturenature andand scopescope ofof auditaudit..

99.. ReviewingReviewing thethe company'scompany's financialfinancial andand riskriskmanagementmanagement policiespolicies..


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Review of information by Audit CommitteeReview of information by Audit Committee

TheThe AuditAudit CommitteeCommittee shallshall mandatorilymandatorily reviewreviewthethe followingfollowing informationinformation::

11..FinancialFinancial statementsstatements andand draftdraft auditaudit report,report,includingincluding quarterlyquarterly // halfhalf--yearlyyearly financialfinancial

informationinformation;;

22..ManagementManagement discussiondiscussion andand analysisanalysis ofoffinancialfinancial conditioncondition andand resultsresults ofof

operationsoperations;;33..ReportsReports relatingrelating toto compliancecompliance withwith lawslaws

andand thethe riskrisk managementmanagement;;


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Review of information by Audit CommitteeReview of information by Audit Committee cont..cont..

44.. RecordsRecords ofof relatedrelated partyparty transactionstransactions

55..TheThe appointment,appointment, removalremoval andand termsterms ofof

remunerationremuneration ofof thethe ChiefChief InternalInternal AuditorAuditor shallshallbebe subjectsubject toto reviewreview byby thethe AuditAudit CommitteeCommittee


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WhistleBlowerPolicytohelp AuditWhistleBlowerPolicytohelp AuditCommitteeCommittee

InternalPolicyon access to AuditCommittee:InternalPolicyon access to AuditCommittee:

(i)(i) PersonnelPersonnel whowho observeobserve anan unethicalunethical ororimproperimproper practicepractice (not(not necessarilynecessarily aa violationviolation

ofof law)law) shallshall bebe ableable toto approachapproach thethe AuditAuditCommitteeCommittee withoutwithout necessarilynecessarily informinginformingtheirtheir supervisorssupervisors..

(ii)(ii) TheThe appointment,appointment, removalremoval andand termsterms ofof

remunerationremuneration ofof thethe ChiefChief InternalInternal AuditorAuditorshallshall bebe subjectsubject toto reviewreview byby thethe AuditAuditCommitteeCommittee..


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ManagementDiscussionReportManagementDiscussionReportAsAs partpart ofof thethe Directors'Directors' ReportReport oror asas anan additionadditionhereto,hereto, thethe ManagementManagement DiscussionDiscussion andand AnalysisAnalysis ReportReport

shouldshould formform partpart ofof thethe AnnualAnnual ReportReport toto thethe

shareholdersshareholders.. ThisThis ReportReport shouldshould includeinclude discussiondiscussion onon

thethe followingfollowing mattersmatters::11.. RisksRisks andand concernsconcerns..

22.. InternalInternal controlcontrol systemssystems andand theirtheir adequacyadequacy..

33.. ManagementManagement shallshall makemake disclosuresdisclosures toto thethe BoardBoard

relatingrelating toto allall materialmaterial financialfinancial andand commercialcommercialtransactions,transactions, wherewhere theythey havehave personalpersonal interest,interest,thatthat maymay havehave aa potentialpotential conflictconflict withwith thethe interestinterestofof thethe companycompany atat largelarge..


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CEO/CFO certificationCEO/CFO certification

CEOCEO (either(either thethe ExecutiveExecutive ChairmanChairman oror thethe ManagingManagingDirector)Director) andand thethe CFOCFO (whole(whole--timetime FinanceFinance DirectorDirector ororotherother personperson dischargingdischarging thisthis function)function) shallshall certifycertify that,that,toto thethe bestbest ofof theirtheir knowledgeknowledge andand beliefbelief::

i.i. TheyThey havehave reviewedreviewed thethe BalanceBalance SheetSheet andand ProfitProfit &&LossLoss AccountAccount andand allall itsits schedulesschedules andand notesnotes ononaccountsaccounts..

ii.ii. TheseThese statementsstatements dodo notnot containcontain anyany materiallymateriallyuntrueuntrue statementstatement nornor dodo theythey containcontain statementsstatements thatthat

mightmight bebe misleadingmisleading..iii.iii. TheseThese statementsstatements togethertogether presentpresent aa truetrue andand fairfair

viewview ofof thethe company,company, andand areare inin compliancecompliance withwith thetheexistingexistingaccountingaccountingstandardsstandards..


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ReportonCorporate GovernanceReportonCorporate Governance

ThereThere shallshall bebe aa separateseparate sectionsection onon CorporateCorporate

GovernanceGovernance inin thethe AnnualAnnual ReportsReports ofof company,company,

withwith aa detaileddetailed compliancecompliance reportreport onon CorporateCorporate

GovernanceGovernance..

TheThe companiescompanies shallshall submitsubmit aa quarterlyquarterlycompliancecompliance reportreport toto thethe StockStock ExchangesExchangeswithinwithin 1515 daysdays fromfrom thethe closeclose ofof quarterquarter asas perperprescribedprescribed formatformat..


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Reasons forfailureofCorporateReasons forfailureofCorporateGovernancein SatyamGovernancein Satyam

1.1. The Typeof ManagementfollowedinThe Typeof ManagementfollowedinSatyam.Satyam.

2.2. HumanfailureHumanfailure-- Typical IndianPsyche.Typical IndianPsyche.

3.3. Nofailureof Mechanism ofCorporateNofailureof Mechanism ofCorporateGovernance.Governance.


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Different Types of ManagementDifferent Types of Managementfollowedin Indiafollowedin India

1.1. FamilyFamily OwnedOwned BusinessBusiness (FOB)(FOB)

2.2. FamilyFamily ControlledControlled BusinessBusiness (FCB)(FCB)3.3. FamilyFamily ManagedManaged BusinessBusiness (FMB)(FMB)

4.4. ProfessionallyProfessionally ManagedManaged BusinessBusiness(PMB)(PMB)


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Family Owned BusinessFamily Owned Business

FamilyFamily /Promoter/Promoter onlyonly ownown thethe business,business,

theythey dodo notnot attemptattempt toto controlcontrol oror managemanage

andand leaveleave itit toto thethe professionalsprofessionals toto runrun andand

managemanage..

ItIt isis easiereasier toto introduceintroduce thethe GoodGood corporatecorporate

GovernanceGovernance..


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Family Controlled Business (FCB)Family Controlled Business (FCB)

TheThe BusinessBusiness isis normallynormally managedmanaged byby thethe

professionals,professionals, butbut withwith thethe remoteremote controlcontrol ofof

thethe Family/Family/ PromoterPromoter..

GoodGood CorporateCorporate GovernanceGovernance isis alwaysalways

influencedinfluenced byby thethe PromoterPromoter andand alsoalso

remotelyremotely controlledcontrolled..


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Family Managed BusinessFamily Managed Business

Like Satyam, the Business totally managedLike Satyam, the Business totally managedby the Family / Promoters. Business Ethicsby the Family / Promoters. Business Ethicshas the flavor of his Personal Ethics.has the flavor of his Personal Ethics.

Good Corporate Governance is at the mercyGood Corporate Governance is at the mercyand at the desire of Promoter.and at the desire of Promoter.

Family Managed Business will always runFamily Managed Business will always run

the risk of failure of Good Corporatethe risk of failure of Good CorporateGovernance . Satyam is the shiningGovernance . Satyam is the shiningexample.example.


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Professionally Managed BusinessProfessionally Managed Business

ThisThis isis thethe mostmost idealideal typetype ofof managementmanagement

ofof thethe Business,Business, whoeverwhoever ownsowns itit.. ThereThere isis

totaltotal separationseparation ofof OwnershipOwnership fromfrom thethe

ManagementManagement..

ItIt isis bestbest suitedsuited forfor thethe introductionintroduction ofof goodgood

andand sustainablesustainable CorporateCorporate GovernanceGovernance..

ThereThere cannotcannot bebe aa SatyamSatyam ScandalScandal..


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Objects of Good Corporate GovernanceObjects of Good Corporate Governance

AttemptAttempt ofof th

eth

e codifiedcodified CorporateCorporate GovernanceGovernance ininCompaniesCompanies ActAct 19561956 andand SEBISEBI RegulationsRegulations isis totoprofessionalizeprofessionalize thethe managementmanagement ofof thethe businessbusinessforfor promotingpromoting interestinterest ofof variousvarious stakeholdersstakeholdersandand eliminateeliminate managementmanagement byby familyfamily..

ExamplesExamples ofof PMBPMB areare L&T,L&T, Infosys,Infosys, Tata,Tata, ICICIICICIetcetc..

UnfortunatelyUnfortunately FamilyFamily controlledcontrolled andand managedmanaged

businessesbusinesses dominatedominate IndianIndian corporatecorporate businessbusiness::ImportantImportant examplesexamples:: MukeshMukesh andand AnilAnil AmbaniAmbaniandand SaytamSaytam etcetc..


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Objects of Good Corporate GovernanceObjects of Good Corporate Governance ContdContd

InIn FMBFMB Business,Business, howhow farfar corporatecorporategovernancegovernance isis ethicalethical oror good,good, totallytotally dependsdependsonon PersonalPersonal EthicsEthics ofof thethe promoterpromoter oror familyfamily..

SatyamSatyam isis FMBFMB andand thethe scandalscandal isis totallytotally dueduetoto personal personal ethicsethics ofof thethe promoter promoter ii..ee..RamalingaRamalinga RajuRaju.. HeHe isis aa ssimpleimple looterlooter ,, aa cheatcheatwithwith uncontrolleduncontrolled greedgreed andand lustlust forfor moneymoney..

ThisThis cancan happenhappen inin anyany familyfamily managedmanagedbusiness,business, pleaseplease looklook outout !!


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SecondReasonis:SecondReasonis:

HumanFailureHumanFailure-- Indian psycheIndian psyche Indians are good human beings, kind, hospitable,Indians are good human beings, kind, hospitable,

very helping and emotional but totally lack moralvery helping and emotional but totally lack moral

courage.courage.

We are not tough individuals, cant say difficultWe are not tough individuals, cant say difficult

No where the only answer should be NoNo where the only answer should be No

We cant disappoint a person who has done favorWe cant disappoint a person who has done favorto us.to us.


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HumanHuman FailureFailure -- IndianIndian psychepsyche ContdContd

ThisThis isis exactlyexactly whatwhat happenedhappened withwith allall thetheeminent,eminent, honesthonest IndependentIndependent DirectorsDirectors ofof SatyamSatyamandand twotwo seniorsenior partnerspartners ofof PWCPWC ,, becausebecause theytheyareare allall goodgood IndiansIndians

AfterAfter receivingreceiving lotlot ofof favorsfavors fromfrom RamalingaRamalinga RajuRajuforfor pastpast manymany yearsyears howhow cancan theythey disappointdisappoint him,him,hurthurt him,him, saysay NoNo toto himhim..

ItIt isis notnot enoughenough toto havehave IndependentIndependent DirectorDirector ororIndependentIndependent AuditorAuditor unless,unless, theythey knowknow whywhy theytheyareare therethere..


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In Satyam, It appears different types of Auditors:In Satyam, It appears different types of Auditors:internal, external, statutory or concurrent haveinternal, external, statutory or concurrent havefollowed the new abbreviations:followed the new abbreviations:

EBITEBIT-- Earnings Before Internal TamperingEarnings Before Internal Tampering EBITDAEBITDA-- Earning before I Tricked Damn AuditorEarning before I Tricked Damn Auditor

CEOCEO-- Chief Embezzlement OfficerChief Embezzlement Officer CFOCFO-- Corporate Fraud OfficerCorporate Fraud Officer NAVNAV-- Normal Andersen ValuationNormal Andersen Valuation RONWRONW-- Return on Notional WorthReturn on Notional Worth GAAPsGAAPs-- Generally Agreeable Auditing PamperedGenerally Agreeable Auditing Pampered

StandardsStandards IFRSIFRS-- Internationally (Accepted) Fraud RelatedInternationally (Accepted) Fraud Related

StandardsStandards


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Suggested RemediesSuggested Remedies

FollowFollow clauseclause 4949 byby spiritspirit andand letter,letter, moremoreimportantly,importantly, thethe SPIRITSPIRIT ofof clauseclause 4949,, whichwhichunfortunatelyunfortunately fewfew followfollow inin thethe industryindustry.. FurtherFurtheramendamend thethe lawlaw toto capturecapture thethe spiritspirit ofof ClauseClause 4949..


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SarbanesSarbanes--Oxley ActOxley Act

UponUpon thethe collapsecollapse ofof EnronEnron inin DecemberDecember 20012001,, onon JulyJuly

3030,, 20022002,, PresidentPresident BushBush signedsigned intointo lawlaw thethe SarbanesSarbanes--

OxleyOxley ActAct ofof 20022002..

TheThe lawlaw isis intendedintended toto improveimprove CorporateCorporate

Governance,Governance, bolsterbolster publicpublic confidenceconfidence inin thethe capitalcapital

marketsmarkets andand imposeimpose newnew dutiesduties andand significantsignificant

penaltiespenalties forfor nonnon compliancecompliance onon publicpublic companiescompanies andand

theirtheir executives,executives, directors,directors, auditors,auditors, attorneysattorneys andand

securitysecurity analystsanalysts..


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Realities of IndianRealities of Indian BoardBoard..

TrulyTruly independentindependent DirectorsDirectors areare aa rarerare breedbreed..

NonNon--ExecutiveExecutive DirectorsDirectors lessless thanthan 11//33 andandcomprisecomprise familyfamily membersmembers oror recentlyrecently retiredretiredCompanyCompany exex--officials,officials, lawyerslawyers andand CharteredCharteredAccountantsAccountants..

InIn manymany casescases agendaagenda paperspapers delivereddelivered totoDirectorsDirectors eithereither tootoo latelate oror atat BoardBoard meetingmeeting..

RarelyRarely BoardBoard meetingsmeetings lastlast moremore thanthan halfhalf ananhourhour.. NoNo doubtdoubt followedfollowed withwith sumptuoussumptuous lunchlunchmanymany timestimes inin 55 StarStar HotelsHotels..


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Realities ofIndian BoardRealities ofIndian Board ContdContd

InIn manymany casescases ManagementManagement makesmakes suresure thatthatoutsideoutside DirectorsDirectors areare dociledocile oror dodo notnot interfereinterferethroughthrough diplomaticdiplomatic selectionselection andand byby notnot givinggivingthemthem sufficientsufficient informationinformation

InIn manymany Companies,Companies, BoardBoard ofof DirectorsDirectors isis aanominalnominal BoardBoard theythey callcall itit aa LegalLegal BoardBoard

RealReal BoardBoard isis thethe BoardBoard ofof ManagementManagementcomprisingcomprising SeniorSenior ExecutivesExecutives headedheaded bybyManagingManaging DirectorDirector..

OnlyOnly mattersmatters requiringrequiring legallegal approvalapproval comescomestoto LegalLegal BoardBoard forfor rubberrubber stampstamp..


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MostMost ofof importantimportant itemsitems slippedslipped underunder omnibusomnibus

itemitem otherother businessbusiness withwith thethe permissionpermission ofof thetheChairChair..

MinutesMinutes listlist numbernumber ofof documentsdocuments asas placedplacedbeforebefore thethe meeting,meeting, mostlymostly nonenone waswas placedplaced..

AgendaAgenda sentsent withoutwithout explanatoryexplanatory notenote oror relevantrelevantdocuments,documents, theythey areare givengiven onlyonly atat thethe meetingmeeting..

ManyMany timestimes halfhalf ofof thethe BoardBoard minutesminutes containscontains mattersmatters

nevernever discusseddiscussed.. TheyThey werewere addedadded afterafter thethe BoardBoardmeetingmeeting asas thethe minutesminutes waswas keptkept openopen untiluntil thethe nextnextmeetingmeeting.. TheThe DirectorsDirectors werewere onlyonly informedinformed ofof thesetheseadditionsadditions..


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SometimesSometimes meetingmeeting heldheld withwith hardlyhardly anyanynoticenotice oror withoutwithout writtenwritten noticenotice.. (No(No provisionprovisionunderunder thethe lawlaw forfor lengthlength ofof thethe notice)notice)

ForeignForeign DirectorsDirectors manymany timestimes nevernever attendattend thetheBoardBoard MeetingsMeetings.. ThereThere areare instancesinstances theythey havehavenevernever seenseen IndiaIndia.. ThisThis isis possiblepossible byby grantinggranting

leaveleave ofof absenceabsence atat everyevery meetingmeeting wh

eth

erwh

eth

er ititwaswas askedasked forfor oror notnot..


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HowHow wewe cancan changechange thethe presentpresent

practicepractice andand improveimprove thetheCorporateCorporate Governance?Governance?

NumberNumber ofof NonNon--ExecutiveExecutive DirectorsDirectors shouldshould bebeincreasedincreased..

TheyThey shouldshould bebe encouragedencouraged toto assertassert theirtheir rightright..TodayToday theythey areare passivepassive andand inactive,inactive, nornor theythey havehavetime,time, nornor thethe moralmoral couragecourage toto saysay difficultdifficult NONO..

BirlaBirla ReportReport reliesrelies onon NonNon--ExecutiveExecutive DirectorsDirectorsandand IndependentIndependent DirectorsDirectors toto usherusher inin goodgoodCorporateCorporate GovernanceGovernance.. ThisThis willwill nevernever happenhappenunlessunless theythey realiserealise theirtheir rolerole andand responsibilityresponsibility..


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Improve the Corporate GovernanceImprove the Corporate Governance ContdContd

NonNon--Executive Directors should be madeExecutive Directors should be madeaccountable for the decisions taken byaccountable for the decisions taken byBoard and for the affairs of the Company.Board and for the affairs of the Company.

Board should meet at least once a month toBoard should meet at least once a month tobe effective and Directors should attendbe effective and Directors should attendmost of the meetings.most of the meetings.

There should be structured performanceThere should be structured performance

appraisal of Managing Director and otherappraisal of Managing Director and otherExecutive Directors by a Committee of theExecutive Directors by a Committee of theBoard.Board.


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Improve the Corporate GovernanceImprove the Corporate Governance ContdContd

In India Shareholders never make theIn India Shareholders never make theBoard accountable for the performance ofBoard accountable for the performance ofthe Company. Both Executive and Nonthe Company. Both Executive and Non--Executive Directors should pay for theExecutive Directors should pay for thefailure to meet the goals of Company.failure to meet the goals of Company.

No law can imbibe ethics in unwillingNo law can imbibe ethics in unwillingBoard. Law cannot be substituted for codeBoard. Law cannot be substituted for codeof best practices, it can only supplement andof best practices, it can only supplement andsupport as it is sought to be done bysupport as it is sought to be done byCompanies Act and SEBI RulesCompanies Act and SEBI Rules


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CURRENT SCENARIOCURRENT SCENARIO

GovernmentGovernment hadhad supersededsuperseded SatyamSatyam BoardBoardandand appointedappointed MrMr.. DeepakDeepak Parikh,Parikh, MrMr..AchutanAchutan MrMr.. KiranKiran KarnikKarnik andand othersothers asasDirectorsDirectors onon thethe newnew BoardBoard..

SEBISEBI allowedallowed SatyamSatyam toto sellsell 5151%%

TheThe FraudFraud hashas beenbeen assessedassessed toto bebe RsRs..70007000CroresCrores

SatyamSatyam hashas nownow decideddecided toto lowerlower thethe revenuerevenueearlierearlier reportedreported fromfrom 1010%% toto 1515%% forfor lastlast 77yearsyears..


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Current scenarioCurrent scenario ContdContd

33,,500500 employeesemployeesh

aveh

ave alreadyalready quitquit.. SIFOSIFO isis inquiringinquiring 2424 customercustomer

companiescompanies inin respectrespect ofof bogusbogus invoiceinvoiceraisedraised byby SatyamSatyam

CBICBI alsoalso hashas nownow chargedcharged RajuRa ju withwithfudgingfudging accountsaccounts.. 6565,,000000 pagepage chargechargesheetsheet filedfiled inin thethe citycity courtcourt..

TwoTwo auditorsauditors ofof PricePriceW

aterW

aterh

eldh

eldaccountableaccountable forfor theirtheir allegedallegedinvolvementinvolvement inin fraudfraud..


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5151

Current scenarioCurrent scenario ContdContd

TechTech MahindraMahindra throughthrough theirtheir subsidiarysubsidiaryVenturebayVenturebay ConsultantsConsultants PvtPvt.. LtdLtd.. havehaveacquiredacquired 3131%% equityequity ofof satyamsatyam..

TechTech MahindraMahindra toto taketake anotheranother 2020%% bybyJuneJune 20102010..

TheThe namename ofof SatyamSatyam ComputersComputers hashas beenbeenchangedchanged toto MAHINDRAMAHINDRA SATYAMSATYAM..

MrMr.. CC.. PP.. GurnaniGurnani hashas beenbeen appointedappointedthethe CEOCEO ofof thethe CompanyCompany whowho previouslypreviouslywaswas anan executiveexecutive ofof SatyamSatyam ComputersComputers..


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Current ScenarioCurrent Scenario

Tech Mahindra toinvestRs.2889 croresTech Mahindra toinvestRs.2889 croresoutofwhichthey maybeinvestingRs.outofwhichthey maybeinvestingRs.1000 crores immediately.1000 crores immediately.

On Mondayi.e.on16On Mondayi.e.on16thth November2009November2009the share pricehadgoneuptoRs.110.the share pricehadgoneuptoRs.110.

The Accounts of Mahindra Satyam willThe Accounts of Mahindra Satyam will

berestatedbasedontherealities.berestatedbasedontherealities.


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corporate governance versus satyam scam- november 21, 2009

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