Corporate Governance, A Myth

S U B M I T T E D BY:
6 1 . N E H A S H R I VA S TAVA
6 2 . S A G A R PAT E L

65. S ANCHI T JAIN

8 4 . RAT U L N A G PA L

63. RITESH DHUNDHUANI

6 4 . P RA GYA A P RA S A D

Flow of Presentation
What is corporate governance?
Need and importance
World Crisis and Reforms
2 Indian Scams Kingfisher And Satyam
Conclusions
Bibliography

What is Corporate Governance?

It refers to the formally established guidelines that
determine how a company is run.
The companys board of directors approves and periodically
reviews guidelines, which must align with companies
direction, performance and regulatory practices.
It involves balancing the interests of the many stakeholders
in a company - these include its shareholders, management,
customers, suppliers, financiers, government and the
community.
It is concerned with holding the balance between economic
and social goals and between individual and communal
goals.

Need and Importance

Effective corporate governance mechanisms ensure better
resource allocation and management raising the return to
capital.
Good corporate governance can significantly reduce the risk
of nation-wide financial crises. Indeed poor transparency
and corporate governance norms are believed to be the key
reasons behind the various economic crisis as mentioned in
coming slides.
Such financial crises have massive economic and social
costs and can set a country several years back in its path to
development

Myth : Shareholders do not

own corporations
Many people incorrectly believe that shareholders own
corporations. This is not true under the law of any known
country. Shareholders only own shares of stock, which
give shareholders certain rights in the company. In law,
corporations are legal persons or entities, they have an
independent personality and cannot be owned by anyone.
Treating a corporation as a legal person means that the
corporation has certain rights and obligations, including
especially the rights to own property, enter contracts, and
be held accountable in its own name for any harm it
causes to others.
Right now, the financial risk to investors when they buy
shares is limited to the amount of money that they have
invested in the corporation or paid for their shares. If a
corporation was owned by its shareholders, they could be
held.

Myth: Shareholders have certain limited rights because they invest capital in
the corporation... but other groups have rights, too

Shareholders own shares, which gives them a number of

organizational, control and economic rights in relation to
the company, such as the right to receive dividends and
to vote on certain matters. Shareholders do have special
rights, but these cannot be justified on the basis of their
relationship with the company, which is related to the
relationship between the company and other
stakeholders, including employees, creditors and
bondholders.

shareholder value by focusing on

short-term stock price or quarterly
returns.
Directors have a duty to act in the best interest of the
company. The best interest of the company is difficult to
ascertain but it cannot be equated with maximizing
shareholder value, and especially not in the short-term.
Directors are free to instead choose to invest in
innovation, research and development, employee
training, improvements to sustainability or other areas if
that will ensure the long-term vitality of the firm.
Furthermore, even if directors wish to maximize
shareholder value, it is difficult to determine what this
means in practice. It may be impossible to identify all
major shareholders and determine their interests.

Myth: Directors are not the

agents of shareholders
It is often said that directors are the agents of
shareholders; this is not true under the company law of
any jurisdiction. Directors have a duty to act in the best
interests of the company. While shareholders should and
normally will benefit from a companys success, directors
do not as a matter of law act on behalf of shareholders.
The myth originates in the principal-agent theory of
corporate law widely held by institutional investors and
legal scholars, particularly in the United States. Under this
theory, directors are the agents of shareholders and
are responsible for acting in shareholders best
interests rather than their own in managing the
corporation.

Myth: Regulatory Compliance

Ensures Good Governance
Reality: Legislation can never account for a large
proportion of corporate fraud, and firms cannot rely on
compliance to create ethical behavior.
Fact: A lot of large scale corporate fraud is committed by
employees at firms that comply with all necessary
regulations. For example, Satyam Computer Services Ltd,
which saw its employees commit Indias largest ever
corporate fraud, was compliant with Indian law and
International Financial Reporting Standards financial
disclosures.

The Most Important Way to

Bolster Corporate
Governance
Reality: Audit committees take the blame for
governance lapses but the real reason is that boards do
not often give the audit committee the right scope or
support it with the right processes.
Fact: Audit committees ineffectiveness has little to do
with their powers or the quality of the director. Their focus
is often diluted as committee charters and responsibilities
are rarely defined, and the group often becomes an
owner of risks the board does not want. This impedes
oversight on governance and increases fraud risk.

Management System is the

Most Important Way to
Record Misconduct
Reality: Establishing fraud detection and controls
systems, although important, are not enough to reduce
misconduct. To build an effective governance framework,
progressive companies create a culture of speaking-up
under which employees report misconduct without the
fear of retaliation.
Fact: According to a 2010 Association of Certified Fraud
Examiners report, employee information was crucial in
clearing up 47% of fraud cases, which is more than all the
other tools fraud management relies on (16 % from
internal audit, 4% from document examination, and 1.5%
from IT controls were the next highest sources of fraud
detection).

KINGFISHER AIRLINES LOSES

LICENSE TO FLY
Kingfisher owes various public sector banks $1.4bn (870m) in debts
and has been frantically trying to raise funds after lenders refused to
give fresh loans. The airline now owes money to staff, airports, tax
authorities and its lenders and may have to be liquidated.
ThefinanciallytroubledKingfisher Airlines lost its flying permit after a
deadline to renew its suspendedlicenseexpired.
The Directorate General of Civil Aviation (DGCA) has suspended
Kingfisher Airlines license to fly till further orderspursuant to Clause
15 (2) of Schedule XI of the Aircraft Rules, 1937, after the airline
failed to deliver a viable financial and organizational revival plan.The
debt-ridden carrier wasgrounded since October2012 after repeated
strikes by workers over unpaid wages.

The Biggest IT SCAM

Satyam Scam
Satyam founder Byrraju Ramalinga Raju resigned as its chairman
after admitting to cooking up the account books. His efforts to fill
the fictitious assets with real ones through Maytas
acquisition failed, after which he decided to confess the crime. With
a fraud involving about Rs 8,000 crores (Rs 80 billion), Satyam is
heading for more trouble in the days ahead.
I am now prepared to subject myself to the laws of the land and
face consequences thereof, Raju said in a letter to SEBI and the
Board of Directors, while giving details of how the profits were
inflated over the years and his failed attempts to fill the fictitious
assets with real ones. Raju said the companys balance sheet as of
September 30 carries inflated (non-existent) cash and bank
balances of Rs 5,040 crores (Rs 50.40 billion) as against Rs 5,361
crores (Rs 53.61 billion) reflected in the books.

Conclusions
With the recent spate of corporate scandals and the subsequent
interest in corporate governance, a plethora of corporate
governance norms and standards have sprouted around the globe.
After the Satyam Scandal, corporate governance, which is the
system that helps firms control and direct operations, is in the
spotlight as key parts of the governance framework such as audit
and finance functions have failed to check the promoter-driven
agendas.
Corporate governance extends beyond corporate law. Its objective is
not mere fulfilment of legal requirements but ensuring commitment
on managing transparency for maximising shareholder values. As
competition increases, technology pronounces the deal of distance
and speeds up communication, environment also changes. In this
dynamic environment, the systems of Corporate Governance also
need to evolve, upgrade in time with the rapidly changing economic
and industrial climate of the country.

References
http://unpan1.un.org/intradoc/groups/public/documents/apc
ity/unpan023826.pdf
http://rtiallahabad.cag.gov.in/rti-website/rti-allahabad
/downloads/material/Background%20training%20materail%20o
n%20corporate%20governance.pdf
http://www.sebi.gov.in/commreport/corpgov.pdf