Corporate Governance - A Comparative Study
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Transcript of Corporate Governance - A Comparative Study
A RESEARCH PAPER ON
CORPORATE GOVERNANCE
-
A COMPARATIVE STUDY
BY
SMT. NUTAN RAMRAO DESHMUKH
[B. Pharm. MBA (Finance, International Business)]
Corporate Governance: A Comparative Study.
Abstract:
Due to globalization, the business world is becoming more and more
borderless. The business world of 21st century is becoming increasingly complex,
uncertain, and unpredictable and is changing at a speed of mouse click. To survive in
such an environment, businesses have to adopt emerging tools, techniques and
management practices. One of such emerging trends in management practices is
Corporate Governance.
Corporate Governance is the set of processes, customs, policies, laws and
institutions affecting the way in which a corporation is directed, administered or
controlled. Corporate Governance also includes relationship among many players
involved (the stakeholders) and the goals for which the corporation is governed. The
principle players are shareholders, management and the board of directors. Other
stakeholders include employees, suppliers, customers, banks and other lenders,
regulators, the environment and the community at large.
Key elements of good corporate governance principles include honesty, trust,
and integrity, openness, performance orientation, responsibility and accountability,
mutual respect and commitment to the organization. Corporate Governance centres
around the issues and problems arising out of the separation between ownership and
control of capital such as rights of shareholders, equitable treatment to all
shareholders including minorities, foreigners and other stakeholders, disclosure and
transparency and the responsibilities of board of directors.
This paper includes a comparative study of Corporate Governance guidelines
issued by three international organizations viz. the Organization for Economic Co-
operation and Development (OECD), the International Corporate Governance
Network (ICGN) and the Asia-pacific Economic Co-operation (APEC) which fairly
represent the thinking and perceptions of people on several governance issues of
corporates and will help to understand the basis differences between the guidelines
issued by these three organizations. The paper also includes a comparative study of
three widely accepted models of corporate governance viz. Anglo-American model,
German model and Japanese model with Indian corporate governance practices. It
helps to understand which model is mostly followed by Indian corporates. This paper
also helps to understand how the corporates, following corporate governance
practices, are recognized and awarded by the society and how the society brings the
corporates, failing to follow corporate governance practices, to the bottom from the
top.
Introduction:
Corporate governance comprises the system and processes which ensure the
efficient functioning of the firm in a transparent manner for the benefit of all
stakeholders and accountable to them. The focus is on relationship between owners
and board in directing and controlling companies as legal entities in perpetuity. The
role of corporate governance is to ensure that the directors of a company are subject to
their duties, obligations and responsibilities to act in the best interest of their
company, to give direction and to remain accountable to their shareholders and other
beneficiaries for their actions.
As per the Advisory Board of the National Association of Corporate Directors
(NACD), New York, “Corporate Governance ensures that long-term strategic
objectives and plans are established and that the proper management structure
(Organization, systems and people) is in place to achieve those objectives, while at
the same time making sure that the structure functions to maintain the corporation’s
integrity, reputation and responsibility to its various constituencies”.
It is a way of life:
Corporate governance is a way of life and not a set of rules. A way of life that
necessitates taking into account the shareholders’ interests in every business decision.
`
Review literature
Sir Adrian Cadbury in his preface to the World Bank publication, Corporate
Governance: A framework for Implementation; states that “Corporate Governance is
… holding the balance between economic and social goals and between individuals
and community goals. The governance framework is there to encourage the efficient
use of resources and equally to require accountability for the stewardship of those
resources. The aim is to align as nearly as possible the interest of individuals,
corporations and society. The incentive to corporations is to achieve their corporate
aims and to attract investment. The incentive for states is to strengthen their
economies and discourage fraud and mismanagement.
The Economist Intelligence Unit has carried out a research on Corporate
governance - The new strategic imperative. In this study they have concluded that
regulations are only one part of the answer to improved governance. Corporate
governance is about how companies are directed and controlled. Designing and
implementing corporate governance structures are important, but instilling the right
culture is essential. Senior managers need to set the agenda in this area. There is an
inherent tension between innovation and conservatism, governance and growth.
Transparency about a company’s governance policies is critical. As long as investors
and shareholders are given clear and accessible information about these policies, the
market can be allowed to do the rest, assigning an appropriate risk premium to
companies that have too few independent directors or an overly aggressive
compensation policy, or cutting the costs of capital for companies that adhere to
conservative accounting policies. Too few companies are genuinely transparent,
however, and this is an area where most organizations can and should do much more.
According to Raja J Chelliah, “the official economic doctrine in India has not
been modified to take account of the serious problems of governance that have arisen
over the years in our country. It is felt that the deplorable weaknesses in the system of
governance in our country can only be remedied through a movement of moral
regeneration backed by sufficient pressure by an enlightened public. Institutional and
structural changes are called for in addition to moral exhortation”.
Research Methodology:
Research Problem:
Corporate Governance needs to be studied separately for two main reasons.
The first reason is that in the past there have been many scams, scandals and flagrant
violations under the veil of corporate impenetrability. Question of what is ‘right’,
‘proper’ and ‘just’ in the decision and actions have been raised in the governance of
organizations.
The second reason is that with more awakened shareholders, and almost
predatory journalistic fervor the demands for adhering to good and ethical Corporate
Governance practices are likely to increase exponentially.
Objectives:
1) To compare corporate governance guidelines given by the OECD with those
of other international organizations.
2) To compare Indian corporate governance practices with the practices followed
by other nations.
3) To compare Infosys and Satyam on the basis of corporate governance.
Type of Data:
The research is based on secondary data.
Sources:
Sources of secondary data include –
1) Reference books
2) Internet
Period:
The research was conducted from 15th July 2010 to 15th September 2010
Data Analysis:
I) To compare corporate governance guidelines given by the OECD with
those of other international organizations-
Many of the international organizations have issued guidelines on corporate
governance. A comparative analysis of the guidelines will help to understand the
basic differences among those guidelines. Below an attempt is made to analyze
comparatively the corporate governance guidelines issued by the Organization for
Economic Co-operation and Development (OECD), the International Corporate
Governance Network (ICGN) and the Asia-Pacific Economic Co-operation (APEC).
Table 1: Corporate governance guidelines given by the OECD, the ICGN and the
APEC
Sr.
No
Key parameters Organization for
Economic Co-operation
and Development
(OECD) guidelines
International
Corporate Governance
Network (ICGN)
global governance
principles
Asia-Pacific
Economic Co-
operation (APEC)
principles
1. Rights of
shareholders
a) Their rights to attend
and participate in AGMs,
to elect Board members,
to receive dividends and
to avail relevant, timely,
regular and accurate
a) Major
organizational changes
require their prior
approval.
b) They have the
opportunity to exercise
a) Establishment of
rights and
responsibilities of all
shareholders.
information
b) Rights to transfer
shares
c) To know capital
structures and
arrangements that confers
on some members,
disproportionate
controlling rights.
d) Corporate control
mechanism should
function efficiently and
transparently.
e) Transparent
transactions; accountable
management.
their voting rights.
c) Right to have
timely disclosure of
the result of
resolutions.
d) Adherence to one-
share, one-vote
standard.
2. Equitable
treatment of
shareholders
a) All shareholders
including minority and
foreign shareholders
receive equitable
treatment
b) Effective redressal for
rights violation.
c) Prohibition of insider-
trading and self-trading.
d) Directors to avoid
decisions concerning their
own interests.
a) one-share, one-vote.
b) Protection of the
rights of minority and
foreign shareholders.
a) Equitable treatment
to all shareholders.
3. Role of
stakeholders
a) Recognition of their
rights as established by
law.
b) Encourage their active
co-operation in creating
sustainable enterprises.
c) Permit performance
enhancing mechanisms.
d) Access to relevant
information.
a) Directors should
build good and
productive relationship
with stakeholders.
b) Directors are
responsible for
providing
accountability to
stakeholders
a) Establishment of
effective and
enforceable
accountability
standards.
4. Disclosure and
transparency
a) Accurate and timely
disclosure on company
a) Timely and full
disclosure of all
a)Timely and accurate
disclosure of financial
objectives.
b) Major share ownership
and voting rights.
c) Financial and operating
results.
d) Directors and key
executives and their
remuneration.
e) Significant foreseeable
risk factors
f) Governance structure
and practices
g) Material issues
regarding employees and
other stakeholders.
information.
b) Disclosure of
shareholding and the
status of voting rights.
c) Disclosure of
Directors’
compensation policies.
d) Annual audits by
external statutory
auditors.
and non-financial
information with
regard to company
performance.
5. Responsibilities
of Board of
Directors
a) Specify key
responsibilities of the
Board
b) Overseeing the process
of disclosure and
communication
c) Monitoring the
effectiveness of
governance practices and
change them, if necessary.
a) Judgment of
Directors independent
of management
operation.
b) Establishment and
nomination of
committees for audit,
compensation and
outside directors.
a) Formation of Board
of Directors and
deciding their
remuneration.
Source: 1) Corporate Governance
Principles, Policies and Practices
By A.C. Fernando
Page No. - 19
2) OECD, ICGN, APEC websites.
The table indicates following facts:
1) Rights of shareholders:
The OECD has given detail guidelines about the rights of shareholders.
These guidelines cover the rights to attend and participate in AGMs to elect
board members, to receive dividend and relevant, regular, timely and true
information about transactions and functioning of management, controlling
rights etc. The OECD stresses on transparency in functioning of management.
Global governance principles given by the ICGN are in line with the
OECD’s guidelines. These include opportunity to exercise voting rights, right
to receive timely information about the resolutions etc. The ICGN makes it
clear to have prior approval of shareholders before undertaking any major
organizational change. It specifies to adhere to one-share one-vote standard.
The APEC just mentions establishment of rights and responsibilities of
all shareholders. No specific rights of shareholders are mentioned by the
APEC.
2) Equitable treatment of shareholders:
All the three international organizations specify to give equitable
treatment to all shareholders.
The OECD makes it clear that all shareholders including minority and
foreign shareholders should receive equitable treatment. The OECD stresses
on effective redressal for rights violations. It also specifies prohibition of
insider- trading and self-trading. The OECD specifies that directors must
avoid decisions concerning their own interests.
Similar to the OECD, the ICGN also stress on providing equitable
treatment to and protecting rights of shareholders. It specifically mentions
minority and foreign shareholders. The ICGN specifies that irrespective of the
status of shareholders i.e. whether he is a minority shareholder or foreign
shareholder or any other type of shareholder, each shareholder should have
one vote for one share held by him.
In contrast with the OECD and the ICGN guidelines, the APEC
specifies equitable treatment of all shareholders. Minority and foreign
shareholders are covered by the word ‘all’ and hence are not separately
mentioned.
3) Role of stakeholders:
The guidelines prescribed by all the three organizations differ in
respect of role of directors in respect of stakeholders. The OECD gives more
stress on the rights of stakeholders whereas the ICGN and the APEC explain
the role of directors in respect of stakeholders.
The OECD specifies that the rights of stakeholders as established by
law should be recognized. It also suggests encouraging the active cooperation
of stakeholders in order to create sustainable enterprise. It also specifies the
right of stakeholders to have access to relevant information.
The ICGN is of the view that the board should be held accountable to
shareholders and responsible for managing successful and productive
relationships with the corporation’s stakeholders. The ICGN concurs with the
OECD principle that “active cooperation between corporations and
stakeholders” is essential in creating wealth, employment and financially
sound enterprises over time.
The APEC suggests establishing effective and enforceable
accountability standards for stakeholders.
4) Disclosure and Transparency:
All the three international organizations specify timely, accurate, full
and transparent disclosure of information.
The OECD specifies that following information must be accurately and
timely disclosed –
a) Company objectives.
b) Major share ownership and voting rights.
c) Financial and operating results.
d) Directors and key executives and their remuneration.
e) Risk factors associated with corporation.
f) Governance structure and practices
g) Issues related to employees and other stakeholders.
The ICGN also specifies timely and full disclosure of information like
information about shareholding, status of voting rights, director’s
compensation policies etc. The ICGN advocates annual audits of corporations
by independent, outside auditors in order to enhance transparency in the
disclosure of information.
The APEC advocates timely and accurate disclosure of financial as
well as non-financial information related to company’s performance.
5) Responsibilities of Board of Directors:
Key responsibilities of Board of Directors as specified by the OECD
include overseeing the process of disclosure and communication of
information; monitoring the effectiveness of governance practices and
changing them if required etc.
The ICGN agrees with the OECD’s enumeration of board duties and
responsibilities. It endorses the assertion that “the board should be able to
exercise objective judgment on corporate affairs independent, in particular,
from management.” To further strengthen the professionalism of boards, the
ICGN endorses that the board members should consider establishing
committees containing a sufficient number of independent non-executive
board members in area like audit, nomination and executive remuneration. The
ICGN advocates that audit, remuneration and nomination committees should
be composed wholly or predominantly of independent non-executives.
The responsibilities of Board of Directors as suggested by the APEC
include formation of Board of Directors and deciding their remuneration.
II) To compare Indian corporate governance practices with the practices
followed by other nations-
Corporate governance systems vary around the world. The three most
commonly used models of corporate governance as suggested by the scholars
include the Anglo American model, the German model and the Japanese
model. Here an attempt is made to compare Indian corporate governance
practices with the practices suggested by the Anglo American model, the
German model and the Japanese model to find out which model is followed by
Indian corporate.
Table 2: Models of corporate governance and their comparison with Indian corporate
governance practices-
Sr.
No
Features Anglo-American
Corporate
Governance
Model
German Corporate
Governance Model
Japanese
Corporate
Governance
Model
Indian Corporate
Governance
Practices
1. Corporative
objectives
Shareholder
value
Long-term
corporate value
Long-term
corporate value
Shareholder value
2. Shareholding Diffused
institutional
investors,
significant block
holders.
Banks, promoter
families, other
corporates.
Financial, non-
financial
corporates.
Directors and
relatives, other
corporates, foreign
investors, Govt.-
term lending
institutions,
foreign investors.
3. Governance
focus
Capital market. Corporate body. Business
network.
Maximize surplus.
4. Decision
making
Outside
stakeholders
excluded.
Within the network
of stakeholders
including
employees, local
community.
Within the
network –
includes
business
associates and
banks as
stakeholders.
Management,
outside
stakeholders
excluded.
5. Control of
corporates
Separated from
ownership.
Linked with
ownership.
Linked with
ownership.
Linked with
ownership.
6. Orientation Short-term gains. Long-term gains. Long-term
gains.
Short-term gains.
7. Long-term
investment in
Physical capital,
R&D, human
capital.
Plant and
equipment,
employee training.
R&D, employee
training.
Physical capital.
8. Capital
market
(Primary)
Liquid. Less important,
due to close ties
with banks.
Less important,
because of close
ties with banks.
Less important due
to institutional
funding.
9. Capital
market
(Secondary)
Important,
frequent hostile
takeovers
possible.
Not important,
hostile takeovers
rare.
Not important,
hostile
takeovers rare.
Not important,
hostile takeovers
rare.
10. Investor
commitment
Low. High, important in
difficult times.
High, important
in difficult
times.
Low.
11. Major
investors
Institutional
shareholders;
Individual
shareholders;
Business
network;
Employees;
Government and
banks.
Banks; Business
network;
Employees;
Government;
Individual
shareholders and
Institutional
shareholders.
Business
network; Main
bank;
Government;
Institutional
shareholders;
Individual
shareholders
and Employees.
Directors and
relatives Other
corporates;
Foreign Investors;
Govt. term lending
institution; Public
shareholding; and
Institutional
investors (UTI).
12. Board Executive and Two-tier boards, Executive and Executive and
composition non-executive
directors.
upper tier-
supervisory board,
lower tier-
management board.
non-executive
directors
(representing
outside finance
institutions).
non-executive
directors.
13. Goal of the
board
To promote
shareholder
wealth.
To promote long-
term organisational
health.
To promote
long-term
organisational
health.
Short-term gains.
14. Executive
compensation
High. Moderate. Low. Moderate, subject
to govt. approval.
15. Dividend High. Low. Low. Low, uncertain.
Source: 1) Corporate Governance
Principles, Policies and Practices
By A.C. Fernando
Page No. - 58
The table reveals the following facts:
1) Corporate objective:
In case of Anglo-American model, the corporate objective is creating
shareholder value whereas in case of both German and Japanese models, the
corporate objective is creating long-term corporate value. Similar to Anglo-
American model, in India, the corporative objective is creating shareholder
value.
2) Shareholding:
In case of Anglo-American corporates, institutional investors are the
major shareholders holding significant blocks of shares. In German corporates,
major shareholders are banks, promoter’s families and other corporates
whereas in Japanese corporates, financial and non-financial corporates are the
principle shareholders. In India, a mixture of practices is followed. Like
Anglo-American model, Govt.-term lending institutions are the shareholders.
Like German model, Directors and their relatives are the shareholders and like
Japanese model, other corporates are the shareholders. Foreign shareholders
can also invest in Indian corporates.
3) Governance focus:
In Anglo-American model, the governance focus is on capital market,
whereas in case of German model, it is on corporate body and in case of
Japanese model, it is on business network. But, in India, Governance focus is
on maximizing surplus which is different from all the three models.
4) Decision making:
In Anglo-American model, the management is responsible for decision
making and outside stakeholders are excluded. But, in case of German &
Japanese model, outside stakeholders like local community, banks etc. are
allowed to participate in decision making. Indian corporates follow the
practice of Anglo-American model. In India, management is responsible for
decision making and outside stakeholders are excluded.
5) Control of corporates:
Control of corporates is separated from ownership in case of Anglo-
American model whereas it is linked with ownership in both German and
Japanese model. Indian corporates too, link control of corporates with
ownership similar to German and Japanese model.
6) Orientation:
In Anglo-American model, corporates are oriented towards short-term
gains whereas in German and Japanese model, corporates are oriented towards
long-term gains. In India, like Anglo-American model, corporates are oriented
towards short-term gains.
7) Long-term investment:
Anglo-American corporates make long-term investments in physical
capital, R&D and human capital. German and Japanese models are somewhat
similar to Anglo-American model. German corporates make long-term invests
in physical assets like plant & equipment; employee training etc. whereas
Japanese corporates make long term investments in R&D and employee
training. Traditionally, Indian corporates were investing long term funds
mostly in physical capital. There was no or very small investment in R&D,
employee training and human capital. But now the trend is changing. Indian
corporates are shifting towards German and Japanese model and are investing
in R&D, employee training and human capital.
8) Primary capital market:
For Anglo-American corporates, primary capital market is very
important as those corporates are mostly dependant on it for funding. In case
of both German and Japanese corporates, primary capital market is less
important due to close ties of those corporates with banks. Traditionally in
case of Indian corporates, primary capital market was less important due to
institutional funding. But now the trend is changing. Similar to Anglo-
American corporates, now Indian corporates also depend on primary capital
market for funds.
9) Secondary capital market:
Like primary capital market, secondary capital market is very
important in case of Anglo-American corporates as capital market is the major
source of funds for corporates. Hence frequent hostile takeovers are possible
in case on Anglo-American corporates. But this is not the case with German
and Japanese corporates. In case of German and Japanese corporates,
secondary capital market is not important. Hence hostile takeovers are rare in
case of these corporates. Traditionally, in case of Indian corporates, secondary
capital market was not important and hence hostile takeovers were also rare.
But now the trend is changing. Similar to Anglo-American corporates,
secondary capital market is important for Indian corporates.
10) Investor commitment:
Investor’s commitment is low in case of Anglo-American corporates.
The securities of these companies are very liquid indicating that investors
remain with corporates only in good times and liquidate their investments in
difficult times. In contrast with this, investor’s commitment is high and is
important in difficult times in case of German and Japanese corporates.
Investors in Indian corporates are also less committed as that of investors in
Anglo-American corporates.
11) Major investors:
Major investors in all the three models are almost similar. These
include institutional shareholders, individual shareholders, business network,
employees, Government and banks. The only difference is that the share of
these investors under each model is different.
E.g. in Anglo-American corporates, the major investors are the
institutional shareholders and then individual shareholders; other investors
include business network, employees, Government and banks. In case of
German corporates the major investors are the banks and then business
network; employees, Government institutional shareholders and individual
shareholders represent small investment. In case of Japanese corporates, the
major investors are business network and then banks; other investors include
Government, institutional shareholders, individual shareholders and
employees.
In Indian corporates, directors and their relatives, other corporates,
foreign investors are having the major share. Other investors include
government, term lending institutions, public and institutional investors.
12) Board composition:
In Anglo-American and Japanese corporates, the board is composed of
executive and non-executive directors whereas German corporates have two-
tier board structure with upper tier- supervisory board and lower tier-
management board. Indian corporates follow same practices as those of
Anglo-American and Japanese corporates having executive and non-executive
directors on the board.
13) Goal of the Board:
Consistent with the corporate objective, goal of the board is to promote
shareholder wealth in case of Anglo-American model. Similarly goal of the
board in case of both German and Japanese models is to promote long-term
organisational health. Traditionally, in case of Indian corporates, the board
was more concerned about short-term gains. But now the trend is changing.
Similar to Anglo-American corporates, the board of Indian corporates is
focusing on the goal of promoting shareholder wealth.
14) Executive compensation:
Executives working with Anglo-American corporates, receive high
compensation, whereas it is moderate in case of German model and low in
case of Japanese model. Indian corporates follow the practices of German
model, giving moderate compensation to executives but subjected to
Government approval.
15) Dividend:
Anglo-American corporates declare high dividends to attract investors
in capital market. It is necessary for these corporates as capital market is the
major source of funds for these corporates. However, German and Japanese
corporates declare low dividends as they get funds mostly from banks.
Traditionally Indian corporates too, were declaring low dividends because of
institutional funding. But, now a days, as the Indian corporates are depending
more and more on capital markets, they are also forced to declare high
dividends.
III) To compare Infosys and Satyam on the basis of corporate governance-
The last few years have witnessed some major scandals and corporate
collapses across the globe. In India, the recent example is of Satyam which was
one of the top IT companies in India. Because of such events, society is becoming
more and more conscious about corporate governance practices implemented by
companies. People are more concerned about how companies are being managed.
Companies that follow corporate governance practices are recognized and
rewarded by the society. On the other hand, companies that fail to follow
corporate governance practices are brought to the bottom from the top by the
society. A comparison of Infosys and Satyam on the basis of corporate
governance clearly supports the above statement.
Corporate governance at Infosys:
Infosys is very strong in the area of corporate governance. Corporate
governance practices were introduced at Infosys nearly a decade ago. Infosys'
greatest contribution is to bring about a sense of decency, transparency and public
commitment to business practices in India. In one instance, when other software
firms were grumbling about a government plan to phase out tax holidays for
software exports, Infosys shocked its peers by announcing it was ready to pay the
tax. The Infosys annual report is a shining example of corporate transparency. The
firm has been a trend-setter in disclosures and a leader in shareholder service. In
1999, Infosys became the first India-registered company to be listed on the
National Association of Securities Dealers' Automated Quotations (NASDAQ).
And in June 2009, NASDAQ paid a tribute to the Bangalore firm's transparent
tradition by selecting two companies - USA Networks and Infosys as the “best
value reporters.” Multinational companies have started studying Infosys as a role
model for disclosure. The company gives details about everything related to it
under the sun in seven international languages, making it most investor friendly.
NASDAQ has pointed out that the company provides segmented information to
not only the shareholders and other stakeholders but also customers, clients,
suppliers, media and analysts. Infosys is that rare company in which many Indian
investors blindly put their life savings, knowing that it will not only be safe but
will also fetch them great returns. Everything they need to know about the
company is available in its balance sheets or in the transcripts of media interviews
with its top management.
Corporate governance philosophy of Infosys:
Corporate governance philosophy of Infosys is based on the following
principles:
1) Satisfy the sprit of the law and not just the letter of the law. Corporate
governance standards should go beyond the law.
2) Be transparent and maintain a high degree of disclosure levels. When in doubt,
disclose.
3) Make a clear distinction between personal conveniences and corporate
resources.
4) Communicate externally, in a truthful manner, about how the company is run
internally.
5) Comply with laws in all the countries in which the company operates.
6) Have a simple and transparent corporate structure driven solely by business
needs.
7) Management is the trustee of the shareholder’s capital and not the owner.
Awards to Infosys for excellence in Corporate governance:
Infosys has been recognized and awarded many times for its excellence
in corporate governance. Below is a list of these awards:
2010:
Infosys, the best managed company in India: FinanceAsia poll
Infosys was voted the best company in management, corporate
governance, investor relations, and corporate social responsibility (India) in a
FinanceAsia magazine survey More than 200 investors and analysts voted in
FinanceAsia’s annual survey of Asia's best managed companies.
2009:
Infosys' corporate governance provides highest level of assurance: ICRA
Infosys has received the highest rating on corporate governance by
ICRA, a leading credit rating agency in India. Infosys’s corporate governance
practices have been rated at CGR1 in ICRA’s Corporate Governance Rating
(CGR) scale of CGR1 to CGR6.
According to ICRA, Infosys adopts and follows practices, conventions
and codes that provide its financial stakeholders the highest level of assurance
on the quality of corporate governance. In its report, ICRA states that "the
highest CGR rating continues to reflect Infosys’ transparent and disbursed
ownership structure; sound Board practices; reasonable sized, cohesive and
articulate Board; its robust executive management structure with visible depth
in management; the considerable thrust on internal systems and control; its
current high quality of disclosures, sound financial position; and consistent
high profitability."
2008:
1) The Asset magazine acclaims Infosys' Corporate Governance
Infosys has been named as the best company in India in Corporate
Governance in The Asset Magazine's annual Corporate Governance Index
2008.
2) Infosys ranked No. 14 among the most respected companies
Infosys has been ranked as the 14th most respected company in the
world by Reputation Institute's Global Pulse 2008.
The Institute's Global Pulse Model assesses the reputation of the
world's largest companies across dimensions of workplace, citizenship,
governance, products / services, innovation, leadership and performance.
Infosys was ranked in the Top 5 in four categories: Fifth in citizenship, fourth
in governance, fourth in products / services and fifth in leadership.
Reputation Institute, a private advisory firm that specializes in
corporate reputation management, evaluated 600 companies by conducting
over 60,000 online interviews with consumers in 27 countries for the Global
Pulse 2008 study.
According to Reputation Institute, Infosys' ranking at No. 14 in the
Global Pulse 2008 recognizes Infosys' growing role among the world's
business elite. In 2007, Infosys was ranked at No. 120.
2007:
The Reputation Institute: Infosys, a globally respected company
The Reputation Institute rated Infosys among the 200 most globally
respected companies. Infosys was ranked at No. 120. The rankings were based
on parameters of Product or Services, Innovation, Workplace, Governance,
Citizenship, Leadership and Performance.
2005:
Infosys tops the regional rankings for best Corporate Governance in
Asiamoney's Corporate Governance Poll
2002:
1) The Institute of Company Secretaries of India National Award for
Excellence in Corporate Governance by the Ministry of Law, Justice and
Company Affairs, Department of Company Affairs, Government of India
2) Golden Peacock Award for Excellence in Corporate Governance in the
Global Category by the World Council for Corporate Governance, London
3) Ranked No.1 in CG Watch 2002, a corporate governance survey of
emerging market companies by CLSA Emerging Markets
2001:
Infosys has been ranked No.2 in corporate governance in a survey of
495 emerging market companies by CLSA Emerging Markets
2000:
1) Infosys was awarded the "National Award for Excellence in Corporate
Governance" by a panel of judges chaired by Former Chief Justice of India,
Shri P.N. Bhagwati. This award is conferred by the Government of India and
sponsored by Unit Trust of India
2) Won the Corporate Award for excellence in Corporate Governance,
Bombay Stock Exchange
1999:
National Award for Excellence in Corporate Governance - Sponsored by the
Unit Trust of India
Corporate governance at Satyam:
Introduction:
Satyam Computer Services Limited was founded in 1987 by
Mr. B Ramalinga Raju. The company offers consulting and information
technology services spanning various sectors, including engineering and
product development, supply chain management, client relationship
management, business process management and business intelligence. The
company listed on the New York stock exchange, national stock
exchange, and the Mumbai stock exchange.
Satyam Scandal:
The Satyam Computer Services scandal was publicly
announced on 7 January 2009, when Chairman Ramalinga Raju confessed that
Satyam's accounts had been falsified. In addition to other controversies
involving Satyam, on January 7, 2009, Chairman Raju resigned after publicly
announcing his involvement in an accounting fraud.
Raju confessed that Satyam's balance sheet of September 30, 2008,
contained the following irregularies:
1) Inflated figures for cash and bank balances of Rs.5040crore (US$1.07 billion)
as against Rs.5361crore (US$ 1.14 billion) reflected in the books.
2) An accrued interest of Rs. 376crore (US$80.09million) which was non-
existent.
3) An understated liability of Rs. 1230crore (US$ 261.99 million) on account of
funds was arranged by himself.
4) An overstated debtor’s position of Rs.490crore (US$104.37million) as against
Rs.2651crore (US$564.66million) in the books.
Effects of scandal on Satyam:
Before scandal, Satyam was considered as one of the four pillars of the
success story of the Indian software industry in the global economy. Along with
Infosys, Tata Consultancy Services and Wipro, Satyam was known for its coveted
Fortune 500 clients, innovative software projects, capacity to train thousands of
software engineers and best-in-class certification of software engineering
practices. It took more than 20 years to create such an image in the society. After
scandal this image of Satyam was converted into ‘Asatyam’ only in one day. The
effects of scandal on Satyam are listed below:
1) Immediately following the news, Merrill Lynch now a part of Bank of
America and State Farm Insurance terminated its engagement with the
company.
2) Credit Suisse suspended its coverage of Satyam.
3) It was also reported that Satyam's auditing firm PricewaterhouseCoopers will
be scrutinized for complicity in this scandal. SEBI, the stock market regulator,
also said that, if found guilty, its license to work in India may be revoked.
4) Satyam was the 2008 winner of the coveted Golden Peacock Award for
Corporate Governance under Risk Management and Compliance Issues, which
was stripped from them in the aftermath of the scandal.
5) The New York Stock Exchange has halted trading in Satyam stock as of 7
January 2009.
6) India's National Stock Exchange has announced that it will remove Satyam
from its S&P CNX Nifty 50-share index on 12 January.
7) Satyam will also be excluded from the CNX 100 index, CNX 500 index and
the CNX IT index. Reliance Capital Ltd will replace Satyam in the main
index.
8) Satyam has lost more than 10000 Crore rupee in a single day trading.
9) $8 Crore changed hands at BSE and 33 Crore changed hands at NSE.
10) Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level
since March 1998, compared to a high of 544 rupees in 2008. In New York
Stock Exchange Satyam shares peaked in 2008 at US$ 29.10; by March 2009
they were trading around US$1.80.
11) Satyam’s largest shareholder, Aberdeen AMC, dumped the tainted software
entity’s shares.
12) Swiss Finance Corp Mauritius Ltd: Sold 7786759 shares at Rs.74.61.
13) Aberdeen International India Opportunities Mauritius Ltd sold 9830811 shares
of the company at Rs.43.41
14) ) Aberdeen Asset Managers Ltd Aberdeen Global Asia Pacific fund: Sold
4179064 shares at Rs.43.41.
15) The founder of Satyam was arrested two days after he admitted to falsifying
the firm's accounts. Ramalinga Raju is charged with several offences,
including criminal conspiracy, breach of trust and forgery.
Satyam at Stock Exchange:
The position of Satyam before and after scandal on the BSE is clearly
indicated by the following graph:
The graph clearly indicates the effect of scandal on Satyam’s share prices in
BSE. The price was Rs. 389.2 in Jan2008, which was increased upto Rs. 523.75
during May2008. During the month of Jan2009, in which scandal was publicly
announced, the price was decreased to Rs.54.05, which came down to Rs.38.35
during March2009. At present, though the position is improving, it is very
difficult for Satyam to regain the earlier position in the market.
Findings:
Data analysis indicates following facts:
1) A comparative study of Corporate Governance guidelines of the OECD, the
ICGN and the APEC indicates that there are no vast differences among the
guidelines given by all the three international organizations. The guidelines
are more or less similar in respect of parameters like rights of shareholders,
equitable treatment of shareholders and disclosure and transparency. Some
differences exist in guidelines related to parameters like role of stakeholders
and responsibilities of Board of Directors.
The OECD’s guidelines are more detail and specific. On the other
hand, the APEC’s guidelines are short and general. The ICGN’s guidelines lie
in between the OECD’s guidelines and the APEC’s guidelines as they are
specific as the OECD’s guidelines but are short like the APEC’s guidelines.
2) Comparison of Indian Corporate Governance practices with commonly used
Corporate Governance models worldwide, viz. Anglo-American model,
German model and Japanese model clearly indicates that in India, a mixture of
Corporate Governance practices is followed. Some of the Indian Corporate
Governance practices are similar to that of Anglo-American model, some are
similar to that of German model and some are similar to that of Japanese
model.
3) Comparison of Infosys and Satyam on the basis of corporate governance
indicates how the companies are awarded as well as penalized on the basis of
corporate governance. Infosys is strong at all key principles of good corporate
governance including honesty, trust and integrity, openness, performance
orientation, responsibility and accountability, mutual respect and commitment
to the organization. This is the reason why it has been awarded and recognized
from time to time by the society. Infosys is a role model of Corporate
Governance. Infosys is that rare company in which many Indian as well as
foreign investors blindly put their life savings, knowing that it will be safe and
bring more returns. Infosys is contributing for making good impression of
Indian companies at the international level.
On the other hand, Satyam has failed to stick to any of the principles of
good Corporate Governance. From the above analysis, it can be observed that
the Corporate Governance practices and principles are not followed by the
Satyam group. This is the reason why it has brought to the bottom from the top
by the society. Satyam had lost trust of investors for itself and other Indian
companies also at international level.
Conclusion:
The corporate governance framework should protect shareholders’
rights. The corporate governance framework should ensure the equitable
treatment of all shareholders, including minority and foreign shareholders. All
shareholders should have the opportunity to obtain effective redress for
violation of their rights. The corporate governance framework should
recognize the rights of stakeholders as established by law and encourage
active co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises. The corporate
governance framework should ensure that timely and accurate disclosure is
made on all material matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the company. The
corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the
board’s accountability to the company and the shareholders.
Traditionally a mixture of Corporate Governance practices was
followed in India. But the current trends are indicating that Indian corporates
are shifting from German and Japanese model to Anglo-American model of
corporate Governance.
For long-term survival, companies must follow Infosys’s path of
Corporate Governance and must remain far away from Satyam’s path.
References:
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Publications, New Delhi, 2007
2) S.K.Bhatia, Business Ethics and Corporate Governance - Concepts, Issues,
Practices and Dilemmas in Shaping Ethical Culture for Competitive
Advantage of Organizations, Deep and Deep Publications Pvt. Ltd. New
Delhi, 2004
3) Ravi Kishore, Taxmann’s Financial Management - Comprehensive Text Book,
6th edition, Taxmann Allied services (P) LTD., New Delhi, 2008.
4) Prasanna Chandra, Financial Management - Theory and Practice, 7th edition,
Tata McGraw-Hill Publishing Co. Ltd., New Delhi, 2008
5) Surender Kumar, corporate Governance – A question of Ethics, Galgotia
Publishing Company, New Delhi, 2000.
6) H.R.Machiraju, Corporate governance, 1st edition, Himalaya publishing
House, Mumbai, 2004
7) A.C.Fernando, Corporate Governance – Principles, Policies and Practices, 1st
edition, Pearson Publication India, New Delhi.
8) www. oecd .org
9) www.bestpractices.cz
10) www. icgn .org
11) www.ecgi.org
12) www.wikipedia.com
13) www.bseindia.com
14) www.infosys.com/about/awards/Pages/aa-awards.aspx