CORPORATE GOVERNANCE & BUSINESS ETHICS

INTRODUCTION
There was a time when businesses were one man show, sole trading corporation was existing at a larger scale. But now in the 21st century geographical boundaries of the countries has removed all the restrictions on trade. All the major economies are linked with each other and there is one key terminology for this international market. i.e. Global Village Most of the giant corporations are joint stock companies, whose share capital is divided between large number of shareholders who are scattered around the globe. Now a days the transaction of the corporation are in million, revenues are in billion and turnover are in trillion. As there is a change in ownership & management pattern now the organization structure are more complex. With such a diversified and complex capital structure & scattered stake holders it becomes very difficult to access the control over the management. Because of complex management, capital and organizational structure for any organization trust worthiness in external and internal environment is the key of success. This is something because of which the potential investors invest their funds in the organization, the creditors offer products on credits, employees render there services to the organization, and government and other organizations provides various benefits and time to time consult in various decision making process. This trust worthiness comes with the transparency of the day to day working of the organization. Social responsibility is a moral duty or volunteer acts of the business for the welfare of society in general. A business cannot run in isolation, it needs a market and customers business takes input from the society in the form of labour ,raw material , plant etc. after processing on this inputs business finally produces output i.e. final product or service for whose consumption business again needs society i.e. market .Therefore the concept of corporate governance emerged. It not only ensures the safety to the share holders investment but also the efficient utilization of resources & attainment of overall corporate objective. The principal stake holders are the shareholders, management and the board of directors. Other stake holders include labour, customer, creditors (e.g. - banks, bond holders), suppliers, regulators and community at large. Corporate Governance is concerned with holding a balance between individual and communal goals. Here there is a difference between corporate governance and social responsibility of business. It is an overall control on activities of the Corporation. CG is related with long-term objectives and plans and the proper management of organization, systems and people. As our country moved to liberalization in 1991 transparent and fair business practices were enforced all over the country. Due to this a number of failures of the companies are reported and many executives left their post due to this. One main reason behind this was

that investors, both national and inter-national are becoming more demanding towards the companies in which they are investing their funds. They are now always in search of those information which effects there investing decisions. The Board of Directors holds central position in the corporate governance structure. There are two kinds of participants in the structure of CG, one is the primary participants and another is secondary or additional in the primary participants includes shareholders and management. Additional includes employees, customers, suppliers, and creditors.

REVIEW OF LITERATURE
CG is the matter of national development in developing countries it is playing an important role in increasing the flow of capital in the firms. The corporate governance is dependent over legal, regulatory and institutional framework. Thats why in 20th century the awareness and the focus on CG was not much but it increased in the 21st century. Yet CG is an activity mainly perceived for the companies who are listed in the stock exchanges. In developing countries there is no corporate governance kind of thing in the small units and on the other hand large scale units are still struggling for telling significance of the CG. From a long ago CG was an ignored issue in the developing countries. In 1997, the East Asian financial crises broke the back bones of their economies. The countries like Thailand, Indonesia, South Korea, Malaysia and the Philippines where worst hit by this economic Tsunami. The reason was withdrawal of Foreign Capital after property assets collapsed. The lack of corporate governance mechanism in these countries highlighted the weakness of the institutions in their economies.

Corporate social responsibility has become a hot business topic in recent years and many well-known business people have expressed their support for it:

Niall Fitzgerald Former CEO, Unilever

"Corporate social responsibility is a hard-edged business decision. Not because it is a nice thing to do or because people are forcing us to do it... because it is good for our business" The business of business should not be about money, it should be about responsibility. It should be about public good, not private greed It takes 20 years to build a reputation and five minutes to ruin it.

Dame Anita Roddick Body Shop

Warren Buffett Berkshire Hathaway

Corporate Governance is the system by which companies are directed & controlled-Cadbury Report (UK), 1992 Corporate Governance has to do with Accountability & Control : who exercise power, on behalf of whom, how the exercise of power is controlled.Sir Adrian Cadbury, in Reflections on Corporate Governance, Ernest Sykes Memorial Lecture, 1993 the fundamental objective of corporate governance is the enhancement of the long-term shareholder value while at the same time protecting the interests of other stakeholders.-SEBI (Kumar Mangalam Birla) Report on Corporate Governance, January, 2000. John L. Collyey, Jr. Jacqueline L. Doyle , George W. Logan , Wallace Stettinius in their book titled What Is Corporate Governance deals about various aspects of Corporate Governance . This book provides a deep insight to the topic. It also talks about duties and responsibilities of top management towards the stake holders and society in general.

Robert A.G. Monks and Nell Minow in their book on Corporate Governance is based on the trends and practices of Corporate sector. This book talks about the practical applicability of Corporate Governance. It also explains the importance of Corporate Governance with the help of various real corporate examples. Corporate failures have reasons first and for most are the bad business plans and poor managerial decisions in some instance the governments pressure and regulatory forbearance is a contributing factor. Second reason of the corporate collapse is fraud or dissimulation by management, ENRON, World Com, Maxwell, BCCI and Polly Pack are some of the examples. In India we have the latest example of SATYAM.

MEANING OF CORPORATE GOVERNANCE

Corporate governance is about promoting corporate fairness, transparency,& accountability. Corporate governance can be defined as the formal system of accountability & control for ethical & socially responsible organizational decisions & uses of resources. Accountability relates to how well the content of workplace decisions is aligned with the organizations strategic direction. Control involves the process of auditing & improving organization decisions & actions. Corporate governance is about commitment to values & ethical business conduct. It is a set of laws, regulations, processes, & customs affecting the way a company is directed, administered, controlled or managed. This includes its corporate and other structures ,cultures, policies and the manner in which it deals with various stakeholders .Some of the important best practices of corporate governance framework are timely & accurate disclosure of information regarding the final situation, performance, ownership & governance of the company. There are many alternative definitions of CG. Here are two:

An obligation, beyond that required by the law, for a business to pursue long term goals that are good for society About how a company manages its business to produce an overall positive impact on society

So CG involves

Conducting business in an ethical way and in the interests of the wider community Responding positively to emerging societal priorities and expectations A willingness to act ahead of regulatory confrontation Balancing shareholder interests against the interests of the wider community Being a good citizen in the community

CHARACTERISTICS OF CORPORATE GOVERNANCE

Participatory Consensus Oriented Accountable Transparent Responsive Efficient & Effective Equitable & Inclusive Follows the rule of law

Components of CG
There are four main components of CG:Economic Legal Ethical Responsibility to earn profit for owners Responsibility to comply with the law Not acting just for profit, but doing what is right, just and fair

human welfare and goodwill Voluntary and Promoting Being a good corporate citizen contributing to the philanthropic community and quality of life

CORPORATE GOVERNANCE FAILURE IN INDIA: SATYAM FIASCO

A Case Study
Satyam Computer Services (Satyam) was a global information technology (IT) solutions company. The company offered a comprehensive range of services including application development, maintenance services, consulting and enterprise business solutions, extended engineering solutions and infrastructure management services. The company also offered business process outsourcing services through Nipuna, a majority owned subsidiary of the company. The company primarily operated in the US. The company was headquartered in Secunderabad, India and employed about 51,000 people. The company recorded revenues of $2,138.1 million during the fiscal year ended March 2008, an increase of 46.3% over 2007. The operating profit of the company was $413.8 million during fiscal year 2008, an increase of 40.5% over 2007. The net profit was $421.8 million in fiscal year 2008, an increase of 41.2% over 2007. Satyam offered a wide range of IT solutions to meet complex business challenges.

DOWN MEMORY LANE 1987 : Incorporated as Pvt. Ltd. Company 1988-1992 : IPO 1993-1996 : Satyam Technology Centre established 1997-2000 : Presence in 30+ countries 2001-2004 : Founded Satyam BPO 2005-2008 : Acquisition of Bridge Strategy, CitiSoft, Knowledge Dynamics, Nitor Solutions, S&V Management 2009 : On 7th January, erstwhile chairman declared that the companys profit had been overstated for several years 13th April : TECH MAHINDRA acquired majority stake in Satyam 21st June : New brand MAHINDRA SATYAM launched

It should be noted that Satyam was the 1 st Indian company to be listed on 3 international stock exchanges i.e. NYSE, DOW and EURONEXT Major Satyam Clients

Promoters' shares had been dwindling over the years

30

Figures in %

25 20 15 10 5 0 Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar01 02 03 04 05 06 07 08

WHAT WENT WRONG? Inflated figures for cash and bank balances of INR 5,040 cr. (as against INR 5,361 crore reflected in the books). Operating Profit were artificially boosted from the actual 61 cr. to 649 cr. Satyam also showed an interest earning of Rs. 376 cr. that was fictitious. An over stated debtors position of Rs. 490 crore (as against Rs. 2651 reflected in the books)

SLIPPERY SLOPE TO DISASTER December08 brought news of pending litigation by a former client, online mobile-payments service Upaid Systems which filed a case of intellectual fraud and forgery against Satyam in 2008 World Bank banned Satyam from doing any of its work after it found Satyam employees had hacked into its system and gained access to sensitive information. It also did not renew their five-year contract On Dec. 16, when Raju announced the company would spend $1.6 billion to buy Maytas only to reverse the decision a few hours later under shareholder pressure. Satyam ADRs lost 50% of their value overnight Satyams secret back office Maytas It is not a mere co-incidence that Maytas is Satyam spelt in reverse way. It was an effort to cover up Satyam fiasco. Maytas is actually run by Satyam Family. It includes Maytas Properties & Maytas Infra Ltd. Maytas was a 2 decade old company. It had been doing remarkably well in the past 6-7 years and projects worth billions were riding upon them.

RAJUS PROPOSAL FOR MAYTAS It all began on 16-12-2008, when Raju thought, buying an infrastructure firm made sense! Satyam to buy Maytas Properties for $ 1.3 billion and 51% stake in Maytas Infra for $ 300 million Deal to be financed by Satyams surplus cash. Raju said that the deal was in complete interest of the investors and informing them was unnecessary WHAT WAS THE REALITY? Raju and family own up to 35% stake in Maytas Raju had shown a swollen gross margin in the period of July-December by almost 600 crores (meaning, swollen records of 1000 crores in a year). So it would take him about 5-6 years to show an accumulated wealth of over 5000 crores (Satyams supposed cash reserve) Raju was siphoning the money from Satyam to Maytas since last 6 years. With Satyam in deep cash crunch, Raju wanted to buy Maytas to cover up Satyams inflated cash Rajus last attempt to fill the fictitious assets with the real ones failed and he nailed a hole in the sinking ship Satyam

ISSUES ADDRESSED IN CORPORATE GOVERNANCE Corporate Governance is concerned with structures & processes for decision making, accountability control & behaviour at the top level of organization. It influences how the objectives of an organization are set & achieved, how the risk is monitored and assured & how the performance is optimized. Corporate Governance measures include non-executive directors, placing constraints on management power & ownership concentration. It includes ensuring of proper disclosure of financial information & executive compensation. Developments in Corporate Governance in India & Abroad The Cadbury Report on the financial aspects of corporate governance, published in the United Kingdom in 1992, was a landmark Adoption of New listing requirement by NYSE (New York Stock Exchange) IN 1988. Corporate Governance is getting focused attention for satisfying the divergent interest of the stakeholders especially after corporate scandals & loss of Shareholders value at Enron & WorldCom. The Scandals led to numerous corporate Governance reforms including Sarbanes Oxley Act in 2002. In India, various committees were set up by SEBI & DCA (Department of Company Affairs) to recommend further improvements in Corporate Governance applicable to Indian Companies. In February,2000,based on the recommendation of Kumar Mangalam Birla Committee,SEBI specified principles of Corporate Governance and introduced a new clause 49 in the listing Agreement of Stock Exchanges, In October 2004, SEBI amended Clause 49 in alignment with the recommendations of the Narayana Murthy Committee. This was implemented in June 2006. NASSCOM has constituted a Corporate Governance & Ethics Committee headed by N. R. Narayan Murthy.

ROLE OF COMMITEES IN CORPORATE GOVERNANCE Board Of Directors:- The Boards role is that of trusteeship to protect and enhance shareholders value through strategic supervision. The strategy should aim at accountability and fulfilment of goals. Audit committee;-They have to provide assurance to Board on adequacy of internal control systems and financial disclosures. Investors Service Committee:- It is to look into redressal of Shareholders and investors grievances ,approval of transmissions, sub -division of Shares ,issue of duplicate shares etc.

ETHICS
Introduction:Ethics are moral guidelines which govern good behaviour. So behaving ethically is doing what is morally right. Behaving ethically in business is widely regarded as good business practice. To provide you with a couple of quotes:

An important distinction to remember is that behaving ethically is not quite the same thing as behaving lawfully: Ethics are about what is right and what is wrong Law is about what is lawful and what is unlawful

MEANING OF ETHICS
Ethics is doing what is right. Ethics are the principles of right conduct governing an individual or a group The word Ethics is derived from the ancient Greek Ethos or ethikos which means Character as the essence of values & habits of a person or a group. Ethics is choosing what is good or bad & having to do with moral duty & obligation Ethics is not feeling, religion, law, science or culture Ethical behaviour is what is morally accepted as good or Right in a particular setting. In contrast, unethical behaviour is that which does not conform to the generally accepted social norms concerning beneficial & harmful actions.

SOCIAL SINS
Mahatma Gandhi advocated people of all faiths to follow ethical principles in all areas of their life particularly avoid the seven social sins: Politics without Principles Wealth without Work Commerce without Morality Knowledge without Character Pleasure without Conscience Science without Humanity Worship without Sacrifice

Sources of ethical standards Utilitarian approach:- To make the most good least harm to anyone. Deontological Approach:-Belief that our ethics are the rights of other person & therefore we should respect it. Fairness or Justice Approach:-Greek philosophy of following ethics because we must give equal treatment to all. Common good Approach:- Ethics for welfare of everyone in the society. The Virtue Approach:-Belief that ethics will become personal habits & upgrade personality.

Business Ethics Business ethics is the application of ethical principles to business. Business ethics are the principles & standards that determine acceptable conduct in business organization These are set of rules which should govern the conduct of business both at the individual or collective level by the application of ethical reasoning to specific business situations & activities. A businessman has to act as a trustee of the society for whatever he has gained from the society. The society has the right to expect that the productive organizations will enhance the general interests of consumers, employees & community. Factors influencing ethical behaviour Individual moral standards & values Influence of managers & co-workers. & Opportunity to engage in misconduct Meaning of Stakeholders Stakeholders mean such constituents of an organization, the individuals, groups or the members, which are affected by. Or can affect the organization in pursuit of its goals. Employees & Directors Trade Unions Customers Suppliers Government & Enforcement Regulators Lenders & Creditors Shareholders & Investors Community/Society as a whole

Benefits of Business Ethics Helps in building better society Better change management during various economic cycles Enhanced employee growth Compliance with legal requirements governing personnel policies

 Lower offences & Fines Better value management associated with quality management, quality management, strategic planning & diversity management. Stronger public image Relationship between business Ethics & Corporate Governance:Both Business Ethics & Corporate Governance concepts are closely linked. A socially responsible firm should be an ethical firm. An ethical firm should be socially responsible

Business Ethics Vs. Corporate Governance Though the Business Ethics & Corporate Governance are closely linked, however there is also a distinction between the two:CG is about responsibility to all stakeholders & not just Shareholders Ethics is about morally correct Behaviour Ethical codes are increasingly particularly with large businesses & cover areas such as: Corporate Social Responsibility Dealings with customers & Supply Chain Environment Policy & Action Rules for Personal & Corporate integrity

Conclusions:In recent decades the concept of Corporate Governance turned out to be a vital strategy for companies to survive in a ruthless market environment. In a condition where markets shift and customers preferences becomes more unpredictable and complex, adopting CG strategy could be a powerful tool for survival. CG-Asia defined Corporate Social Responsibility as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. Many companies all over the world are now starting to see the benefit of practicing CG in their bottom lines. European countries are now seriously engaged in this concept on different levels and even in interpretation of how the concept works. Despite the wide spectrum of approaches to CG, there is a large consensus among practitioners on its main features. First, is that, CG is behaviour by business over and above legal requirements, voluntarily adopted because business deem it to be in their long-term interest. Second, CG is intrinsically linked to the concept of sustainable development: businesses need to integrate the economic, social and environmental impact in their operations. Third, CG is not an optional add-on to business core activities but about the way in which business is managed. Following the above line, CG could not be equated to Philanthropy. It is a complete business strategy that aims to ensure the long-term viability of the business, by assuming an active role in the development of the community, the economy, and the environment through good business practices. It is not different from being a good citizen of a country! CG brings full load of benefits aside from ego-trip as others thought. I will tell you why. Todays world has become smaller, and markets have become ever more accessible, thanks to globalization. Globalization however, would force many companies including small and the medium enterprises to adopt CG in order to remain competitive locally and in the international market. In some countries Government regulations such as environmental and social issues have increased, and standard and laws are also often set at a supranational level. An example of this is the European Union, where regulations and standards are applied to all member countries. Moreover, buyers in these countries would want to know

that the product they buy did not come from companies and manufacturing processes that caused or even poses threat to the environment. They are also concerned with the companys records - giving fair wages, good working conditions, and the like. These are highlighted in the media, which becomes a clear advantage to businesses with good CG programs. During the past decade, consumers and communities have become sensitive to business practices of companies existing in their areas or from which they buy their goods and services. It has been observed that communities would prefer and are supportive of companies they see as concerned with the general welfare of the people in their business operation than the employment opportunities it generates. Achieving and maintaining industrial peace is also a direct consequence of a good CG strategy. Another emerging concern nowadays that could easily be responded through good CG, is the difficulty of companies in retaining highly skilled and competent personnel or luring them to work in your company. In recent years many human resource analysts noticed that the most competent and skilled workers would want to be associated with companies that have good business practices and reputation. This is the possible explanation why even large corporations whose reputation of being tax cheaters, involved in corruption, products and practices that are harmful to the environment, non- involvement in responding to social issues and concerns, have hard time getting good quality, or highly skilled employees. Companies with good business practices have clear advantages in convincing investors. Recent studies have shown that a growing number of investors would prefer companies with strong CG programs. They see CG involvement as an indication of the companys long-term potentials. There is a growing perception among enterprises that sustainable business success and shareholder value cannot be achieved solely through maximizing short term profits, but instead through market-oriented yet responsible behaviour.

REFERENCES
http://icai.org/ http://en.wikipedia.org/wiki/Corporate_governance#Principles http://www.corporategovernancedefinition.net/