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Corporate governance is a term that refers broadly to the rules, processes or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.
Well-defined and enforced corporate governance provides a structure that, at least in theory, works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards andÂ best practicesÂ as well as to formal laws. To that end, organizations have been formed at the regional, national, and global levels.
In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.
There are various models of corporate governance like:
Corporate governance gets affected by how the boards are structured and what is there style. There are various roles and responsibilities of the board members also. And there are codes and conducts to be followed which keep a check on adherence to the corporate governance.
Issued involved in the cases related to the corporate governance are mainly about the non adherence to the basic guidelines, rule, regulations and laws that a business should be following. There are three basic issues involved in corporate governance.
Ethical issues deal with problems concerning fraud. This is mainly a problem with capitalist companies because companies often go for fraudulent ways to achieve their goals. Such frauds are done in form of making cartels or taking bribes, gifting potential customers etc for achieving long term owner value.
Efficiency issues deal with how the management is performing as the management is the one who is to be held responsible to ensure that shareholders get fair returns on the investment made by them.
Accountability issues talk about the accountability of the management towards its various stakeholders. It is kept in place to ensure transparency because the various activities of company affect workers, customers and society at large.
Some of the other issues that can be addressed by corporate governance in this new era are as follows:
Growth of private companies
The magnitude and complexity of corporate groups
The importance of institutional investors
Rise in hostile activities in take over
Litigation against directors
Need for restructuring of boards
Changes in auditing practices
The failure of corporate governance could be seen as part of the corporate culture which was central to poor decision-making. In 1995 an independent due diligence report described HIH as a company which has not yet made a complete transition from an entrepreneurially run company influenced strongly by senior management and from which senior management benefits significantly, to that of an ASX listed company run primarily in the interests of shareholders. This remained true for the remainder of the company's life.
Commissioner Owen identified four disastrous business ventures which were critical to the ultimate collapse of HIH. These instances of poor decision-making were caused by and reflect a poor corporate governance culture.
â€¢ They established operations in UK during1993. But if we consider the board minutes of HIH there is no disclosure regarding any board consideration for checking the compatibility of UK operations with the broader strategy of the company. There was no proof to support Board's participation in any of the business plan. Poor quality management information and inadequate accounting systems further weaken the Australian management's ability to monitor and control the UK operations effectively. So it resulted in losses to tune of $1.7 billion.
â€¢ Board accepted the idea of acquiring US business without taking any affirmation from the management regarding their opinion that whether the entry into the US market would be profitable or not. It failed to carry out any due diligence as a result of that it failed miserably to measure the level of risk involved. Finally this acquisition resulted in losses of $620 million.
â€¢ When the board meeting was called to discuss the acquisition of FAI, five of 12 directors were not present and among the seven directors present four participated through video conferencing. They concluded the board meeting with a consensus to proceed with the acquisition without even going through the board papers which included the report prepared by HIH's financial advisers. They proceeded with the acquisition even though they were not allowed to carry out the due diligence which led to a general lack of knowledge about FAI and its financial position. So they depended on the publically available information which did not disclose considerable under reserving of FAI's insurance business and they could not measure FAI's actual worth leading to losses of $590 million.
â€¢ In January 2001, the Allianz joint venture started operating, involving the sale of HIH's profitable retail insurance businesses which was acquired from FAI in the joint venture resulting in an immediate cash flow crisis which made the liquidation of HIH faster. The likely cash flows and even the major strategic change was simply ignored by all the board members. The information that the board had was lacking a careful analysis of its implications and effect on cash flow so they could not even measure the extent of risk involved and as a result only after a very short span of 10 weeks of this joint venture, HIH was placed in provisional liquidation.
Main reasons of failure
Dominant chief executive
Ray Williams was chief executive from the beginning of the business until he resigned in October 2000. There was lack accountability in serious management and lack of independence within the board which continued even during the financial crisis. There were no defined limits on William's authority in areas such as investments, donations, gifts and payments to staff. They had merged Personal funds with that of company even without making a disclosure of the same to the board.
The chair failed to ensure that all important matters were put on the agenda and it was not controlled by management. They had a board which was only concerned with past financial performance and which had no vision for the path ahead. The chair could not bring crucial things for discussion as the CEO did not wish this matter to be raised. This again gives an example of a dominant CEO.
Silence of the Board
There were many crucial issues going on in the organization which BOD also knew but it remained silent on it.
Failure to assess the concept of conflict of interests
There were transactions taking place involving conflict of interest which the management could not trace out. Some related business transactions were also carried out in which interested board members remained silent.
Ad hoc executive remuneration
The executive remuneration was proposed by a person called Williams who used to evaluate the performance without any benchmarks as they were removed at the request of the CEO and his performance was reviewed by the Chairman who was free to increase his pay without consulting other and there was no performance review also.
Ineffective audit committee
The audit committee was only concerned with matters directly related to the accounts and the figures and not at all related to the risk management and internal control. It should be comprised of only non-executive directors whereas here audit committee was regularly attended by all directors including executive directors. And non-executive directors hardly met the audit committee which is again a bad signal as they should regularly meet them to check the authenticity and reliability of management decisions.
Unusual accounting transaction
There was continuous failure on the part of management to meet budgetary targets which led to hiding of such under-performance and making unusual accounting entries.
Compromised auditor's independence
Andersen was the auditor for HIH whose freedom was compromised in many respects:
There were three former Andersen's partners on HIH's board of which one was the chairman of the board and continued receiving fees under a consultancy agreement and they used to get hefty amount fees from non-audit work which became the root of conflict of interest with their audit obligations.
Ian Robert Maxwell (1923-91), British business executive, grew up in a tight-knit Jewish community. After escaping from the Nazis in 1939, Maxwell had a fight with the British during World War II. In 1951, he bought Pergamon Press who was a publisher of textbooks and scientific journals. After the success of his company he could win election in Parliament in 1964 as a Labor member. He lost control over Pergamon and his career in politics in 1969 due to a financial scam but he took huge debts and repurchased Pergamon in 1974. In the 1980s, he again borrowed funds to establish a diversified media empire which was encompassing the Mirror Newspaper Group, the U.S. book publishing company Macmillan, the Official Airline Guides, Berlitz, and the New YorkÂ Daily News.Â
After the death of Maxwell investigators found out that he had misappropriated hundreds of millions of dollars from his companies and their pension plans to finance his corporate expansion. Maxwell's companies were then compelled to file for bankruptcy protection in Great Britain and the United States in 1992.
What exactly led to this governance problem was misappropriation of the funds. Maxwell used four methods to do so. Firstly, he pledged assets to get additional loans. But what he did is he sold off the assets which he had pledged instead of handing them over to the lender. Secondly, he diverted cash and shares from Mirror Group Newspapers to Bishopsgate Investment Management Limited which was again controlled by him. And those shares were then used to pledge them as security for getting loans for other private companies of Maxwell.
And thirdly he was using the cash generated from such pledge of shares to boost up the share price of MCC and MGN without disclosing such purchases as they were against the Stock Exchange Regulations. Fourthly, he took cash from MGN. And he used to pass huge amount to his private companies.
Others also helped Maxwell in this scam like City of London. His accountants Coopers and Lybrand Deloitte played a major role in making this scam a success as they never reported the pension funds used for companies purpose because as per principles of pension trusteeship they should be treated as an entity separate and distinct from the company that employs the workers who contribute to the pension fund. Even Goldman Sachs was also held responsible to manipulate the share prices of MCC.
And finally Kevin Maxwell and Ian Maxwell got arrested on June 18, 1992 under the charge of conspiracy to defraud but got released in 1996. Kevin became the Britain's biggest bankrupt in 1992 with a debt of £400 million. Even Goldman Sachs and Coopers and Lybrand Deloitte were also disciplined by regulators. So finally the culprits got their share of punishment but the violence of corporate governance caused a great damage mainly to the employees whose pension funds were at stake and other people who invested in this company due to the artificially inflated share prices.
Infosys, one of the biggest IT giant in India set up two committees CII and Kumar Mangalam Birla to recommend good governance norms to enhance the value proposition for the shareholders and same time it will help in protecting the interest of the stakeholders. By late 1990s Infosys emerged as one of the best practicing company as compared to others. Infosys was the recipient for many awards and recognition due to good governance practices. Infosys won the award for "National Award for Excellence in Corporate Governance by Government of India in 2000.Based on the CII (Confederation of Indian Industries) Report started publishing Compliance Report which helps in maintaining high degree of transparency in disclosing information to stakeholders. The Infosys CEO was responsible for maintaining corporate strategy, acquisition decision, external contracts, and brand equity and board matters. Similarly Infosys COO was handling the responsibility of taking responsibility for all day to day activities, Operational issues, maintaining quality and productivity, employee empowerment, client satisfaction and employee retention. Every board member is having a responsibility to accomplish an important task to its excellence. Infosys had also given the powers to its no- executive directors to pass their valuable suggestions and judgement on the efficiency of its business plans. They not only played a vital role in decision making but also were an active member in providing their contribution in one of the committee i.e Nomination committee, Compensation Committee and Audit Committee. The main responsibilities of the KumarMangala Committee are as follows:
To view corporate Governance from the perspective of investors and Stakeholders.
To promote and raise the standards of the Corporate Governance.
Disclosure of material information
Responsibilities of independent and non- independent Directors
To draft code of corporate Best Practices
Comparison between two Committees:
CORPORATE GOVERNANCE AT KNIGHT TRANSPORTATION, INC.
Knight Transportation, Inc.(KTI) is a US based trucking company which was started in the year 1989. It set standards in corporate governance by adopting written documents in accordance with the Sarbanes-Oxley Act for public companies. As per the NYSE standards, board is expected to have a majority of independent directors. Independent director means there is no relation with KTI. And any member of the Board of Directors (BoD) of KTI could not serve for more than four boards other than KTI. The board had formed different committees including Audit Committee (AC), Nominating and Corporate Governance Committee (NCGC), Compensation Committee (CC) and Executive Committee (EC). The AC helps in supervising the integrity of financial statements and examining the abidance with the financial regulations. The NCGC make recommendations regarding the potential candidates for the director post. The CC reviews the compensation details of BoD and recommends it to the same. The main purpose of EC was to act on behalf of the BoD, when it was not session.
The employees and shareholders who were serving in the BoD did not get any additional pay for undertaking the board duties.
The Overall management at KTI was done by BoD.
BoD fixed the employee compensation plan, the amount of cash dividends and frequency of cash dividends after taking consideration of the financial condition.
All the transaction to shareholder were reflected in the earnings per share.
A research study on corporate governance and firm performance came out with a measurement of corporate governance called Gov-Score. Six performance measures under three categories namely operating performance, valuation and shareholder payout.
Final Findings and Recommendation
The four pillars in corporate Governance are as follows:
Accountability: Ensuring that management is accountable to the Board and board is accountable to Shareholders
Fairness: Protecting Shareholders rights and providing effective redress for violation
Transparency: timely and accurate disclosure on all material matters
Independence: to minimize conflicts procedure and structures are in place
Elements Of Corporate Governance:
Good Board Practices
Well defined Shareholders rights
A company should have a control environment, they areas are as follows:
Internal control procedures
Risk management framework
Disaster recovery system
Good media management techniques
Independent external auditors conducting audits
Independent committee established
Compliance function established
Why corporate Governance
Better access to external finance
Lower cost of capital- interest rates on loans
Improve company's performance
Reduce risk of Corporate Crisis
Higher firm valuation and share Performance
A good Corporate Governance will help in making a company more stable and efficient in terms of Performance, Quality, Dynamic environment, culture, Social Responsibility and Growth. They will helps in following ways:
Respect and Support the protection of internationally proclaimed human Rights
Helps in ensuring they are not complicit in human rights abuses
Uphold the freedom of association and effective recognition of the rights to collect bargaining.
Eliminate the form of compulsory or forced labor
Support discrimination against child labor
Eliminate discrimination with respect to employment and occupation
Corruption should not be a part of Business
Encouraging user- friendly environment and technologies
Take initiative to promote environmental responsibility