CSR & BE

(Unit-4)
MBA – III TERM
Prepared by Dr. M.A. Sikandar
MANUU, Hyderabad
 Brief background about Sarbanes –
Oxley Act, 2002 (USA)
• George W. Bush, the then President of United States (US)
signed the Sarbanes-Oxley Act (SOX) into law on30 July,
2002, the legislative reform thus enacted was among the
most intrusive in US corporate history.
• Its scope was extensive, covering internal controls, external
financial disclosures, corporate governance, and auditor
behavior.
• SOX Act sought to restructure the way that executives,
directors and auditors combine to provide share-holders
with information about company performance and
financial health, and to give shareholders control over the
incentive structures used for aligning the interests of man-
agement and shareholders.
 Salient Features of SOX Act
• In particular, SOX required:
(i) company executives to personally certify financial
accounts and internal reports (with increased and
additional criminal sanctions for known departures
from these requirements)
(ii) boards of directors to take responsibility for
monitoring firm auditors (with greater liability for
improper governance practices)
(iii) auditors to forgo providing non-audit services for
audit clients, to attest to the ac-curacy of internal
control reports, and to follow detailed procedures on
how to detect fraud.
 Salient Features of SOX Act
• The US Congress introduced, and subsequently
passed, SOX in response to a series of business
scandals involving several well known companies:
Enron, WorldCom, Waste Management, Sunbeam
and Global Crossings,
• Of these, Enron and WorldCom had the largest
economic impact. Enron began life in 1930 as a
consortium of energy companies. Prior to its
demise in 2001, it had become one of the largest
companies in the US energy sector.
 Case of US based Enron Energy Corporation
(1985-2007, Houston, Texas, USA)
• Enron was able to ensure that failed and poorly-performing
assets were assigned to unconsolidated affiliate businesses
and thus kept out of its publicly available financial records,
thereby allowing a significant overstatement of earnings.
• Public awareness of Enron’s financial troubles began on 16
October 2001 with the announcement of a third quarter
net loss of $618 million. When the full extent of the various
manipulations were finally discovered, Enron collapsed,
filing for Chapter 11 bankruptcy protection on 2 December
2001.
• This had immediate and significant economic
consequences, including the loss of over 4500 jobs at its
Houston operations, $1.3 billion in Enron employee
retirement funds, and $61 billion from Enron’s
shareholders’ investment portfolios.
 WorldCom case
• WorldCom was a major telecommunications firm that had evolved from the breakup
of AT&T in 1984. Like Enron, its problems also stemmed from questionable
accounting practices – such as the reporting of fees and expenses as assets, expense
misclassifications, and the marking of operating costs as long-term investments. And
also like Enron, the principal outcome was inflated forecast and reported earnings.
• In February 2002, WorldCom announced a cut in its earnings projections after
incurring a second-quarter multi-billion dollar write-down charge. Subsequently, the
company ‘unmasked’ a series of fraudulent transactions totaling $3.8 billion in June
2002, closely followed (on 21 July 2002) by entry into Chapter 11 bankruptcy
protection.
• This overtook Enron as the largest bankruptcy in US history. A significant by-product
of these events was the demise of accounting firm Arthur Andersen. Having been the
auditor for a number of the collapsed companies - including Enron, WorldCom, and
Waste Management - it suffered an irreparable tarnishing of its name and a
subsequent collapse of demand for its services.
• The Arthur Andersen, the former consultancy and outsourcing practice of the firm
separated from the firm's accountancy practice and split from Andersen Worldwide
in 2000, when it rebranded to Accenture, as it continues to operate.
 WorldCom case
• Introduced in response to several high profile US corporate
collapses, SOX has proven to be of great value to academic
researchers. But whether it has also benefitted the group it was
intended to help – shareholders – is much less certain.
• While apparently improving market liquidity and some aspects of
corporate governance and information disclosure, SOX has also had
a number of more deleterious effects: greater costs of auditing,
governance and human capital, and compliance more generally; a
mis-match between auditor quality and firm risk; more firms
delisting or otherwise staying below the regulatory radar; less
corporate investment and risk-taking; and ambiguous changes in
the quality of investor information and capital market efficiency.
Moreover, several of these adverse consequences seem to be more
extreme for small firms.
 Host country operational measures
• Last few decades have seen the emergence and intense
proliferation of multinational corporations as economic entities and
global actors whose operations and activities have transcended not
just geographical but also legal and jurisdictional boundaries of
nation states.
• Governments of host countries adopt various measures that affect
the day-to-day life of foreign affiliates and domestic firms in a
number of ways and for a number of reasons. In fact, virtually all
countries have an elaborate regulatory framework that prescribes
the rights and responsibilities of firms. A number of these measures
are specifically designed to affect the operations of foreign
investors. It is the latter set of measures that is labelled “host
country operational measures”
https://unctad.org/system/files/official-document/psiteiitd26.en.pdf
 Host country operational measures
• The concept “host country operational measures ” (HCOMs)
captures the vast array of measures implemented by host countries
concerning the operation of foreign affiliates once inside their
jurisdictions. HCOMs can cover all aspects of investment (such as
ownership and control, hiring of personnel, procurement of inputs,
sales conditions) and usually take the form of either restrictions or
performance requirements.
• They are usually adopted to influence the location and character of
foreign direct investment (FDI) and, in particular, to increase its
benefits in the light of national objectives. Some are those
investment measures affecting trade flows, better known as trade-
related investment measures (TRIMs). Often, HCOMs are also
methods of intervention whose aim is to correct actual or perceived
market distortions.
• In international investment agreements (IIAs), HCOMs have rarely
been considered as a separate issue.
 Host country operational measures
• Usually, HCOMs are implemented with the aim of influencing the location and
character of investment and, in particular, its costs and benefits. Governments
frequently attempt to influence the pattern of resource use through investment
policies.
• For example, local content requirements have been imposed on affiliates of
transnational corporations (TNCs) to encourage industrialization or to expand local
employment; technology transfer obligations have been used to develop and
diffuse industrial skills; and minimum export requirements have been imposed to
earn foreign exchange.
• Local equity requirements have also been used to ensure a certain degree of
control for local management, and licensing requirements to strengthen the
position of domestic firms in contract negotiations with foreign enterprises.
• In this sense, HCOMs are intended to perform a developmental role. Policies that
affect the free interplay of market forces can also cause distortions in the pattern
of international trade and investment. (e.g. Indo-China trade relations were
affected due to border conflict – Doklam issue in May 2020)
 Host country operational measures
• More generally, HCOMs are usually part of a broader policy
regime aimed at enhancing national welfare. Moreover,
such measures are often used by host country
Governments in conjunction with other specific policy
instruments such as investment incentives.
• Incentives may be granted in various forms such as cash
grants, tax breaks, inputs and factor subsidies or export
incentives. FDI may also be favourably induced by the
prospect of supplying a protected market. In the bargaining
process with potential investors, Governments can thus use
HCOMs, together with incentives, to impose some kind of
development-conditionality on an investment
(UN/DESD/TCMD, 1992).
HCOMs operative restrictions or performance
requirements on foreign companies
HCOMs operative restrictions or performance
requirements on foreign companies
HCOMs operative restrictions or performance
requirements on foreign companies
https://unctad.org/system/files/official-document/psiteiitd22.en.pdf
https://unctad.org/system/files/official-document/unctaddiaeia2011d6_en.pdf
Corporate Governance – Rajat Gupta and Goldman's
Insider Trading Case study
 Corporate Governance – Rajat Gupta and Goldman's
Insider Trading Case study
• Rajat Gupta Was Found Guilty of Insider Trading in the highest-ranking insider trader was the
quickest to fall to the judgment of a jury.
• Gupta, an IIT Delhi and Harvard Business School alumnus, was charged with breach of fiduciary
duties and for passing on inside information to Raj Rajaratnam, billionaire founder of the Galleon
Group hedge fund, who is already serving an 11-year prison sentence after being convicted for
securities fraud.
• For former Goldman Sachs board member Rajat Gupta, justice was swift. Finding former McKinsey &
Co. global managing partner Rajat Gupta guilty of insider trading took by the Jury of U.S. District
Court in Manhattan.
• The jury of eight women and four men considered the charges against Gupta for less than a full day
before reaching a split verdict of guilty on four counts, including conspiracy, and not guilty on two of
the five securities-fraud charges.
• They found Gupta guilty of leaking confidential information he learned as a Goldman Sachs board
member on Sept. 23, 2008, then phoning hedge-fund operator Raj Rajaratnam, who within a minute
of getting the tip from Gupta began buying $43 million in Goldman stock.
• Noting that the jury in the Rajaratnam trial took 12 days to find him guilty after a prosecution case
full of “smoking hot evidence,” Columbia University Law Professor John Coffee said he was a little
surprised by the swiftness of the split verdict against Gupta since much of the case was
circumstantial evidence, rather than direct testimony from co-conspirators. Still, there was a wiretap
tape of a conversation between Rajaratnam and one of his co-conspirators in which he claimed to
have information from a Goldman Sachs board member.
 Corporate Governance – Rajat Gupta and Goldman's
Insider Trading Case study
• Gupta, regarded as the ultimate trustworthy and sagacious insider in international business when he
was named to the Goldman Sachs board, faces 20 years in prison on each of the three securities
charges and five years on the conspiracy count. U.S. District Judge Jed Rakoff allowed Gupta to
remain free on bail, pending sentencing scheduled for Oct. 18.
• The guilty verdict was a big win for U.S. Attorney Preet Bharara’s office, which has used extensive
wiretaps in an investigation begun in 2007 to prosecute insider trading. So far more than 60 people
have been convicted.
• Bharara said in a statement, “Rajat Gupta once stood at the apex of the international business
community. Today, he stands convicted of securities fraud. He achieved remarkable success and
stature, but he threw it all away.”
https://www.mof.gov.np/uploads/document/file/Training%20Material%20Rajat%20Gupta%20Insider%2
0Trading%20Case%20File_20150723073207.pdf

https://www.youtube.com/watch?v=46uIp11zQks
Rajat Gupta Rebuilding his life after seven years spending in the jail (Mar 2019 CNBC story)
https://www.youtube.com/watch?v=9TmwLcFwzWU (NDTC Nidhi Razdan story 2019)

https://www.moneylife.in/article/rajat-gupta-convicted-of-insider-trading/26310.html