NATURE OF CORPORATE GOVERNANCE

• Accountability is the hallmark of corporate

governance.

• In today’s competitive borderless world environment,

the fundamentals have been significantly
transforming corporate governance and stakeholders
in an integral relationship.
 NATURE OF CORPORATE GOVERNANCE
• While change is the solitary invariable in this
world, all the governed companies will have to
accept the changes in and around them in a way
that does not impair their vision when they serve
the society at large.
 NATURE OF CORPORATE GOVERNANCE
• In the recent series of corporate scandals,
even elite corporate were no exception. For
instance, the case of Enron is one of the
clearest examples of corporate abuse of
power. Consequently, the need for fair and
proper disclosure and reporting has
become crucial.
 NATURE OF CORPORATE
GOVERNANCE
• Companies have to be responsive in facing
altered social and economic relations such as
digital environment, information, corporate
social responsibility, accounting-disclosures
transparency, investor awareness, investor
protection, increased flow in trade and
transnational investment.
 NATURE OF CORPORATE
GOVERNANCE
• These changes have been brought about
through an evolutionary process, most
often referred to as ‘globalization’.
 NATURE OF CORPORATE GOVERNANCE
• Good corporate governance is the answer to
ethical and moral challenges. The quality of
corporate governance depends mostly on the
moral conduct of persons managing the affairs
of the corporate in any capacity as manager,
regulators or auditors. Each of these players
must realize their responsibilities to the
society.
 NATURE OF CORPORATE
GOVERNANCE
• Transparency and disclosure standards
are very important with regard to
transactions of directors, promoters,
associates and other in legal and
contractual relations.
 NATURE OF CORPORATE
GOVERNANCE
• Good governance is not just good
management. It is something which is much
broader, and includes fair, efficient and
transparent administration designed to meet
certain well defined objectives in an
organization.
 NATURE OF CORPORATE
GOVERNANCE
• The essence of good corporate governance
is a framework which ensures effective
accountability of management towards all
its stakeholders.
 NATURE OF CORPORATE
GOVERNANCE

Good governance ensures that all the

stakeholders, be they shareholders,
employees, customers and suppliers,
government and the community, all
get fair and adequate attention to
meet their justified requirements.
CORPORATE GOVERNANCE
• It also involves the corporate to ensure
that environmental and societal
requirements of the community in
which it operates, are adequately
addressed.
 CORPORATE GOVERNANCE
• Good governance demands that a
corporate house must have a responsibility
to set exemplary standards of ethical
behavior in its internal and external
relationships, thereby achieving ‘value
addition’ in terms of stability and growth,
confidence and long term sustenance of
stakeholder relationships, brand equity and
excellent governance credentials.
 NATURE OF CORPORATE
GOVERNANCE
• The need of the hour is a total shift
towards ‘shareholder approval and
disclosure based regime’ from the
erstwhile ‘government approval based
regime’ on the issue of company
affairs.
 Rationale for Corporate Governance:
• Corporate’s are continuously entering into and bringing new activities
into the fold of the Indian economy.

• In doing so, they were emerging internationally as efficient providers

of a wide range of goods and services while increasing employment
opportunities at home.

• At the same time, the increasing number of options and avenues for
international business, trade and capital flows had imposed a
requirement not only for harnessing entrepreneurial and economic
resources efficiently but also to be competitive in attracting
investment for growth.

• These developments necessitated modernization of the regulatory

structure for the corporate sector in a comprehensive manner.
 Enron scandal
•Enron Corporation
•Type Defunct / Asset-less Shell Co.
•Industry formerly Energy
•Founded in Omaha, Nebraska, 1985
•Headquarters Houston, Texas, United States
•Key people
•Kenneth Lay, Founder, former Chairman and CEO
•Chief Financial Officer Andrew Fastow
•Arthur Andersen External Auditor
•Jeffrey Skilling Internal auditor

•The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of
Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time,
Enron undoubtedly is the biggest audit failure.[1]
• Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of
executives that, through the use of accounting loopholes, special purpose entities, and poor financial reporting, were able to hide billions in debt from failed deals and projects.
Chief Financial Officer Andrew Fastow and other executives were able to mislead Enron's board of directors and audit committee of high-risk accounting issues as well as
pressure Andersen to ignore the issues.
• Enron's stock price, which hit a high of US$90 per share in mid-2000, caused shareholders to lose nearly $11 billion when it plummeted to less than $1 by the end of
November 2001. The U.S. Securities and Exchange Commission (SEC) began an investigation, and Dynegy offered to purchase the company at a fire sale price. When the deal fell through,
Enron filed for bankruptcy on December 2, 2001 under Chapter 11 of the United States Bankruptcy Code, and with assets of $63.4 billion, it was the largest corporate bankruptcy in U.S.
history until WorldCom's 2002 bankruptcy.[2]
• Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United States District Court,
but by the time the ruling was overturned at the U.S. Supreme Court, the firm had lost the majority of its customers and had shut down (see Arthur Andersen LLP v. United States).
Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were
enacted to expand the reliability of financial reporting for public companies.[3] One piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying, altering, or fabricating
records in federal investigations or for attempting to defraud shareholders.[4] The act also increased the accountability of auditing firms to remain objective and independent of their clients.[3]
• Kenneth Lay founded Enron in 1985 through the merger of Houston Natural Gas and InterNorth, two natural gas pipeline companies.[5] In the early 1990s, he helped to initiate the
selling of electricity at market prices and, soon after, the United States Congress passed legislation deregulating the sale of natural gas. The resulting markets made it possible for traders
such as Enron to sell energy at higher prices, allowing them to thrive.[6] After producers and local governments decried the resultant price volatility and pushed for increased regulation,
strong lobbying on the part of Enron and others, was able to keep the free market system in place.[6][7]

•Bankruptcy
• Enron's stock price (former NYSE ticker symbol: ENE) from August 23, 2000 ($90) to January 11, 2002 ($0.12). As a result of the drop in the stock price, shareholders lost nearly $11
billion.[2]
• Enron's European operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection in the U.S. two days later on December 2. It was the largest bankruptcy in
U.S. history (before being surpassed by WorldCom's bankruptcy the following year), and it cost 4,000 employees their jobs.[2][117] The day that Enron filed for bankruptcy, the employees
were told to pack up their belongings and were given 30 minutes to vacate the building.[118] Around 15,000 employees held 62% of their savings in Enron stock, purchased at $83.13 in early
2001; when it went bankrupt in October 2001, Enron's stock later plummeted to below a dollar.[119]
• In its accounting work for Enron, Andersen had been sloppy and weak. But that's how Enron had always wanted it. In truth, even as they angrily pointed fingers, the two deserved each
other.
•Employees and shareholders
• Enron's headquarters in Downtown Houston was leased from a consortium of banks who had bought the property for $285 million in the 1990s. It was sold for $55.5 million, just before
Enron moved out in 2004.
• Enron's shareholders lost $74 billion in the four years before the company's bankruptcy ($40 to $45 billion was attributed to fraud). As Enron had nearly $67 billion that it owed creditors,
employees and shareholders received limited, if any, assistance aside from severance from Enron. To pay its creditors, Enron held auctions to sell its assets including art, photographs, logo
signs, and its pipelines.
•Sarbanes-Oxley Act
• the corporate scandals that followed Enron led to the passage of the Sarbanes-Oxley Act on July 30, 2002. The Act is nearly "a mirror image of Enron: the company's perceived
corporate governance failings are matched virtually point for point in the principal provisions of the Act.
 WORLDCOM
Case Study
• In 1998, the telecommunications industry began to slow down and WorldCom's stock was declining.
CEO Bernard Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom
stock that was used to finance his other businesses endeavors (timber, yachting, etc.). The company's
profitability took another hit when it was forced to abandon its proposed merger with Sprint in late 2000.
During 2001, Ebbers persuaded WorldCom's board of directors to provide him corporate loans and
guarantees totaling more than $400 million. Ebbers wanted to cover the margin calls, but this strategy
ultimately failed and Ebbers was ousted as CEO in April 2002.
Beginning in 1999 and continuing through May 2002, WorldCom (under the direction of Scott Sullivan
(CFO), David Myers (Controller) and Buford Yates (Director of General Accounting)) used shady
accounting methods to mask its declining financial condition by falsely professing financial growth and
profitability to increase the price of WorldCom's Stocks.
The fraud was accomplished in two main ways. First, WorldCom's accounting department
underreported 'line costs' (interconnection expenses with other telecommunication companies) by
capitalizing these costs on the balance sheet rather than properly expensing them. Second, the company
inflated revenues with bogus accounting entries from 'corporate unallocated revenue accounts'.
The first discovery of possible illegal activity was by WorldCom's own internal audit department who
uncovered approximately $3.8 billion of the fraud in June 2002. The company's audit committee and board
of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, and the
Securities and Exchange Commission (SEC) launched an investigation. By the end of 2003, it was
estimated that the company's total assets had been inflated by around $11 billion (WorldCom, 2005).
• On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection, the largest such filing in
United States history. The company emerged from Chapter 11 bankruptcy in 2004 with about $5.7 billion in
debt. At last count, WorldCom has yet to pay its creditors, many of whom have waited years for the money
owed.

On March 15, 2005 Bernard Ebbers was found guilty of all charges and convicted on fraud, conspiracy
and filing false documents with regulators. He was sentenced to 25 years in prison. Other former