Contents.

• Corporate Governance, sustainability, Ethics, & Corporate Social Responsibility.

Corporate Governance.

Definitions.• Cos.

Directed/controlled in interest of SH.

Development/History.• Corporate collapse.• Cadbury,Greenbury

.• Supplemented by

Tyson,Turnbull & smith.

Principles.• Leadership.• Effectiveness.• Accountability.• Remuneration.• Relations with

shareholders.

Corporate Governance

details.

Internal Control ,Audit Committee, &

Disclosure

SOX.• Enforced

via legislation.

• Enhanced documentation..

Company Act 2013.

What is Corporate Governance.• Corporate Governance may be defined as a set of systems, processes and

principles which ensure that a company is governed in the best interest of all stakeholders.

• It is the system by which companies are directed and controlled. • It is about promoting corporate fairness, transparency and accountability.• It ensures: Adequate disclosures and effective decision making to achieve corporate

objectives; Transparency in business transactions; Statutory and legal compliances; Protection of shareholder interests; Commitment to values and ethical conduct of business.

Development of corporate Governance.

• CG regulation have developed largely as a result of a series of corporate failures in the 1980 & early 1990.Such as- Maxwell , Enron, worldcom,barings bank, Satyam( Early 2009-India).

• The development of CG is closely associated with the UK, thal links CG with risks & internal Controls.

• The USA introduced the Sarbanes-Oxley Act after collapsed of Enron & WorldCom.

• In India, Company Act 2013 introduced the law of Corporate Governance after failure of Satyam in early 2009.

Why corporate Governance matters.

• To establish sound relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders.

• For sustainable economic development.• For improving performance.• For adding value.• For reducing investment & reputational risk.• For developing capital markets.

The OECD( organization for economic co-opearation & development) Principles of Corporate Governance.

• The OECD identifying the key practical issues: the rights and equitable treatment of shareholders and other financial

stakeholders, the role of non-financial stakeholders, disclosure and transparency, the responsibilities of the Board of Directors. The OECD Principles are universally applicable to all types of corporate

governance systems in countries at all levels of economic development.

Core principles of Corporate Governance.( CG)1. Leadership.2. Effectiveness.3. Accountability.4. Remuneration.5. Relations with shareholders.

Corporate Governance & Internal Controls.

• The board is responsible for: Maintaining a sound system of internal controls, Reviewing the effectiveness of internal controls,and Reporting to the shareholders that this review has been carried out.• It is the responsibility of management to: Identifying & evaluate the risk faced by the company, for consideration by the board. Design,opearte and monitor a suitable system of internal control.• The Turnbull report is the most specific report regarding the requirement for internal

controls, which suggest that directors should review internal controls under the five heading identified by COSO in 1992.

Control environment. Risk Assessment. Control activities. Information & communication. Monitoring.

Corporate Governance & Audit Committee.

• Audit committee were first required under the Cadbury code ( now required by the UK CG code.) to address the following concerns.

Remuneration of auditors-decided by the directors. Appointment of the auditors-at the discretion of the directors in practice. Reports of the auditors- received by the directors. The director had the power to give other lucrative work to auditors.

• Responsibility of an audit committee.1. Review Financial statement.2. Review internal controls.3. Liaise with internal auditors.4. Liaise with external auditors.5. The setting of audit fee .6. Recommendation on appointment & removal of the Auditors.

Key Points of SOX.

SOX key Points

Auditor Independence.Auditors are restricted in the additional services they can provide to an audit client.

Audit Committee.Company must have an audit committee- will be disallowed from trading if it does not have one.

Internal Control Report.Annual report must include statement concerning the internal control systems in the company.

Certification of Accuracy of financial statements.Must be vouched by CEO and CFO.

Increased Financial

disclosures.

Restriction on Dealing.Directors are prohibited from dealing in shares at ‘sensitive times’

Audit Partner.Senior partner must be changed every five years.

Satyam Computer Services Ltd.- Case

• Satyam was first launched in Hyderabad in 1987 by Rmalinga Raju.• In 1991-debuts in BSE with an IPO over-subscribed over 17 times.• It was a ‘ rising star’ in Indian outsourced IT service industry.• It was an example of India’s growing success.• Satyam won numerous awards for innovation, governance & corporate accountability.• In Sep. 2008, World council of Corporate governance awarded the ‘ Global Peacock awards ‘ for

global excellence in corporate governance & accountability.• Unfortunately, less than 5 months after winning the awards Satyam became the centrepiece of

massive accounting fraud.• Dec 23, 2008 World bank bars Satyam from doing business with the bank’s direct contracts for

a period of 8 years for providing improper benefit to bank staffs.• Jan 07, 2009, Ramlinga resigned admitting that company inflated its financial results.• It inflated its Revenue ,cash and bank balance ,& Accrued Interest on FD, Overstated its

debtors & understated its Liabilities.• Promoters shareholding falls from 25.6% to 2.18% from march 2001 to dec 2008.• The price of share fell to Rs.11.50 per share compared to Rs. 544 in 2008.• In dec. 2008, Satyam had total market capitalization of $ 3.2 billion.

Fabricated Financial statement of Satyam.

In Crore. Actual Reported Differences

Cash and Bank Balances 321 5,361 5,040

Accrued Interest on bank FDs Nil 376 376

Understated Liability 1,230 nil 1230

Overstated Debtors 2,161 2,651 490

Revenues (Q2 FY 2009) 2 2,112 2,700 588

Operating Profits 61 649 588

**The fraud took place to divert company fund into Real estate investment keep high earning per share, raise executive compensation. & make huge profits by selling stake at inflated price.

Breach of fiduciary duty by Ramlinga.

• Greed for money ,power,competion, success,& presitge compelled Mr Ramlinga to ‘ride the tiger’ which led to violation of all the duties imposed on them as fiduciaries:-

• The duty of care,• The duty of negligence.• The duty of loyality,• The duty of disclosure towards the stakeholders.

Corporate governance failure revealed Satyam scandal.

• Satyam scandal is the classic case of negligence of fiduciary duty, total collapse of ethical standard& lack of corporate social responsibility.

• Low ethical & moral standard by top management & greater emphasis on short-term success.

Continued-------------

Corporate Governance failure

• Satyam grossly violated all rules of corporate governance • The Satyam scam had been the example for following

“poor” CG practices. It had failed to show good relation with the shareholders and employees.

• It fails to disclose transparency in business transaction.• Failed to comply with legal & statutory compliances.• Unable to protects the interest of stakeholders.• Unethical action & code of conduct.• Inadequate disclosure of financial information of

company to stakeholders.

Company Act 2013- Corporate governance implementation after failure of Satyam.

CG focus on six critical themes.

Increased Reporting framework. Inclusive CSR Agenda.

Wider Director & Management Responsibility.

Emphasis on Investor

Protection.Easier

Restructuring .

Higher Auditor Accountability.

Key Impact areas in the the area of CG as per Cos Act 2013.Board structure & responsibility. Enhanced responsibility. Role of Independent director promoted. Mandatory KMP. Mandatory women director for certain cos. Performance evaluation of board & individual members.Disclosure & reporting. Enhanced disclosure in directors; reports.- risk management, internal controls for financial

reporting, legal compliance, RPT,CSR, etc. Compulsory consolidation of accounts. Disclosures of Shareholding pattern.. Disclosure of public money lying unutilised.

• Enhanced restriction on RPT,Loans & Investments.• Enhanced power & role of auditors and restricted from providing certain services.• Mandatory formation of CSR committee with atleast one ID.• Implementation of Risk mangement policy.• Internal Financial control& their operation effectivness.