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:

1) C.V.Baxi, Corporate Governance - Critical issues, 1st edition, Excel Books

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