Thursday, September 3, 2009

Bernard Madoff's Ponzi Scheme

Is it a case of hamstrung by bureaucracy, inexperienced investigators, misjudgment, improprieties or much more to it?

In a blistering Executive summary report posted on SEC’s web site on 2nd September 2009 by US SEC’s inspector general, states that the regulators missed “numerous” red flags that had led to Madoff‘s $65 billion Ponzi scheme and never did a “thorough and competent” probe despite complaints dating to 1992.

In spite of five probes and having caught Madoff in “lies and misrepresentations” SEC failed to follow up on inconsistencies. But for Madoff’s self confession of the crime in December 2008, the regulators would have never ever found out. The financial crisis has exposed many breakdowns in regulation, but none has involved such a large fraud by a single person.

The laxity of regulator in discharging duties for around one and half decades had only encouraged the fraudster to continue the crime audaciously for such a long period. The fraud left thousands of clients, including charities, retirees and celebrities, devastated. Such failures are unpardonable and do not act as deterrent.

Click Here to read the Executive Summary Report
Click Here to Read Full Report
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Monday, August 31, 2009

Satyam Lessons and Corporate Governance Reforms

“The directors (managers) of such companies, however, being managers of other people’s money than their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own… Negligence and profusion, therefore, must always prevail more or less in the management of the affairs of such a company.”

Adam Smith - An Inquiry into “The Nature and Causes of The Wealth of Nations”, p.31.


INTRODUCTION

The Corporate Governance, has never ever, since the Satyam Episode, become such a household word. A confessional letter of 7th January 2009 from Mr. Ramalinga Raju, founder Chairman of Satyam, divulged the accounting scam of the order of US $ 1.6 billion, and shook the whole country with tremors felt throughout the globe. Mr. Ramalinga Raju can be credited as the only corporate fraudster to have admitted his misdemeanors – fudging of accounts, inflated revenues, non-existing profits, and the fraudulent bank deposits and audaciously sustaining it for seven long years. The Mr. Ramalinga Raju’s misdeeds, unfortunately had given negative publicity of India Inc so far a positive story. The fraud has undermined the trust in the government, companies, and markets alike. In India, nobody had ever imagined anything to go wrong at Satyam, one of India’s best known IT companies, which ironically had received the Golden Peacock Award for Corporate Governance in 2008.

This episode has led to debates in India, about some of inadequacies in the corporate governance norms. Questions have been raised about the performance/ effectiveness of board of directors, roles of auditors, the impact of regulations, disclosures, etc. However, the silver lining to this whole episode was the proactive role played first time ever in India by the shareholder activists in opposing the unanimously approved board’s resolution of December 16, 2008, in acquiring a property of companies (Matyas Properties and Maytas Infra) owned by the son of Mr. Ramalinga Raju, which led to revelation of frauds being committed by promoter behind the scene. If a large company like Satyam could do it for years, what’s the guarantee more are not doing it? It is therefore, important that the Satyam fraud needs to investigated and sentence the fraudsters swiftly and harshly to increase 'deterrent aspects’.

The frauds of such magnitudes provide a good opportunity for introspection. These times also expose the shortcomings and vulnerabilities of the system. Conflicts always have hidden solutions. There are lessons to be learnt from Satyam’s nemesis too. It is one such great opportunity to reassess some of the existing framework on corporate governance, systems for better enforcements of regulations; effective roles and duties of directors, executives, regulators; ethics in businesses and empowerment of minority shareholders.

OVERVIEW OF INDIAN CORPORATE GOVERNANCE

India’s corporate governance codes are on par with the best in the world, the importance of continuing to assess it against international best practice, to suit to the Indian ethos & culture with utmost sincerity and keenness in enforcement has been highlighted by the recent fraud at Satyam.

The Indian corporate would appreciate the fact that the corporate governance in India has not been forced upon them by the government, but it was a voluntary and path-breaking initiative from the Indian industries association - Confederation of Indian Industry (CII). It was necessitated, for the fact that India Inc was to move forward and globalize itself towards international standards in terms of disclosure of information by the corporate sector and, through all of this, to develop a high level of public confidence in business and industry in the process of building large global conglomerates. CII had vigorously lobbied and pressurized the government of India for its implementation.

Corporate governance initiatives in India began in 1998 with the “Desirable Code of Corporate Governance” – a voluntary code published by the CII, and the first formal regulatory framework for listed companies specifically for corporate governance, established by the SEBI, widely known as Clause 49 of the Listing Agreement – Aimed at improving corporate governance in the country. The latter was implemented in February 2000, following the recommendations of the Kumarmangalam Birla Committee Report.

Legal reforms has been ongoing, with SEBI in 2003 revised the Clause 49, as per the recommendations put forward by the committee and public comments received. Subsequently, the SEBI received a number of feedbacks/ representations, which were deliberated once again by the Narayana Murthy Committee and post discussion, SEBI directed further amendment to the Clause 49 in October, 2004. The amendment to Clause 49 of the Listing Agreement has been the topic of elaborate deliberations and discussions in the Indian corporate scene. The difficulties in achieving compliance prompted many apex chambers of commerce to appeal for an extension of the extended deadline of 31 December 2005, without success. The ease with which SEBI introduced mandatory corporate governance standards in India is unparallel.

The Companies Act, 1956 was undoubtedly a significant landmark in the development of Company Law in India. It consisted of 658 sections and fourteen schedules. The Act was enacted with the object of amending and consolidating the law relating to Companies and certain other associations. The main object of the Act was to provide protection to investors, creditors and public at large and at the same time leaving management free to utilize its resources and energies for the optimum output. However, the working of the Companies Act brought to light several lacunae and defects in its provisions. Therefore, the Act was amended from time to time. But despite extensive changes the principal Act still suffers from certain serious defects. Moreover, after liberalization, the increasing number of options and avenues for international business, trade and capital flows had necessitated modernization of the regulatory structure for the corporate sector in a comprehensive manner.

In 2004, the Indian Government took up a comprehensive review of the Companies Act, 1956. The aim was to strengthen compliance norms and to provide a governance structure for unlisted firms. The new Companies Bill has been based on best international practices and fosters entrepreneurship. As a result the Union Cabinet on 29th August 2008 gave its approval for introduction of the Companies Bill, 2008 in the Parliament to replace the Companies Act, 1956, the existing statute for regulation of companies in the country and considered to be in need of comprehensive revision in view of the changing economic and commercial environment nationally as well as internationally. The bill had lapsed with the dissolution of the house in December 2008 and it has now been re-introduced on 3rd August, 2009. The Companies Bill seeks to enable the corporate sector in India to operate in a regulatory environment of best international practices. The provisions of Companies Bill are broadly considered to be suitable for addressing various contemporary issues relating to corporate governance, including those recently noticed during the investigation into the affairs of erstwhile Satyam.

The bill has now been re-christened as Companies Bill 2009, and will be forwarded to a Parliamentary Standing Committee for recommendations. With the standing committee set with no time frame for giving its recommendations, the passage of the new law is likely to take over a year. It is quite sad that the amendment of the Company Act 1956 has been languishing for so many years now. It is earnestly hoped that speedy passage of the Companies Bill will now be ensured.

LESSONS FROM SATYAM EPISODE

The Satyam board on December 16, 2008, had unanimously approved a proposal to acquire 100 percent of closely held Maytas Properties for Rs 6,240 crore ($ 1.3 billion) and 51 percent of Maytas Infra for Rs 1440 crore ($300 million). The latter acquisition was proposed to be done in two stages: first, Satyam would acquire 31 percent from the promoters at Rs 475 a share, and in the second, it would buy another 20 percent from the market through an open offer at Rs 525. The two acquisitions would have totals expenditures of Rs 7680 crore ($1.6 million).

The immediate reaction of institutional shareholders and investment analyst, as soon as the information become public the next day, was that it was daylight robbery and the promoters were siphoning money out of Satyam. They further vehemently reacted and said that they would to go to any length to prevent this from happening. Mr. Ramalinga Raju was left with no option to abandon the plan at the first place, but also had to put in his papers, confessing cooking of the books for several years, on 7th January 2009, sending shockwave all throughout the corporate board. However, the silver lining to this whole episode was the ascendancy of the Shareholders Activism, one of the first times ever in India. But for the proactive role played by the shareholders and the institutional investors, the nefarious activities committed clandestinely by promoters would not have seen the light of the day.

In the Indian context, it is well known that the many of the companies are controlled by the families and would like these to be handed over to their sons and daughters. The promoters may pursue interests that are not necessarily desirable from the point of view of the commercial success of the company. The promoters are all powerful making even the academically well qualified Independent Directors, as in the case of Satyam having people like; Vinod K Dham, Mendu Rammohan Rao, Krishna G Palepu, Mangalam Srinivasan…, appear dwarfs and not of independence. This has brought to attention once again the role of the independent directors.

As a consequence of the fallout, all the independent directors resigned one after another. These included Mangalam Srinivasan, Vinod K Dham, Krishna G Palepu, T R Prasad, Prof. V S Raju and M Rammohan Rao.

It is one thing to have elaborate codes, but quite another for companies to follow them in letter and spirit. Yet another is the question of enforcement if companies do not adhere to the standards. Weakness of enforcement in India is a real issue. The unraveling of these events at Satyam has once again put spotlight on some of the corporate governance practices and has exposed the following weaknesses:

1. Lax Regulatory systems
2. The imperious and Machiavellians promoters/ CEOs and their unbridled greed
3. Connivance and collusion of Auditors and poor auditing practices
4. Timid and acquiescent independent directors
5. Shareholders activism and Empowerment of minority shareholders
6. Empowerment of Whistle blowers

We ought to refrain from taking quick-fix regulatory measures. It would be worthwhile to search for holistic solutions to these issues; which are relevant in the Indian context. The choice of changes in the regulatory frame work should be compatible with the country’s own values and legal system. The system adopted should be agile enough to fore warn the early signals of a brewing crisis and take corrective measures. The system should encourage “proactiveness” rather than be a "reactionary", otherwise status will not change. With the present day state of art computer technologies, this is not impossible.

One must, however, understand that no matter how strong a regulatory system is, it cannot always prevent frauds. Despite the enormous increase of disclosures and stringent risk management systems in US post the Sarbanes Oxley Act, inability of the system to read the early sign of impending recent Subprime crisis, Madoff's Ponzi scheme, and willingness to take corrective action is one such example. Moreover, strong measures often lead to expensive regulations and defiance. There are limits to legislations as a lot depends on the integrity and ethical values of various corporate players such as directors, promoters, executives and shareholders. The key lies in management decisions and its commitment to establish and follow rigorous governance systems. The implementation must be in the letter and spirit, and one should recognize the responsibility of the company towards its stakeholders.

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Saturday, August 22, 2009

Super (Human) Independent Directors

The Hon’ble Union Minister for Corporate Affairs, who had delivered the inaugural address on 21st August 2009 at the “National Conference on ’Corporate Governance’” organized by the Institute of Directors, asserted the government’s commitment to demystify issues relating to corporate governance.

Referring to the new Bill on company affairs, the Minister said the government was working to simplify the law by bringing down the provisions from 600 to about 400. He further said that there was a need to restrict the number of directorship an individual could hold. “We don’t have superhuman being to be the director of 20-25 companies”.

“Those aspiring for the posts should be aware that it is a position of responsibility and not a joy ride,” he said. (Source: Business Standard (New Delhi Edition) dated 22nd August 2009)

The above issue of "Super (human) Independent Director" was commented upon by me on the blog “Indian Corporate Law” on 30th July 2009. To read the full article click here.
It is also quoted verbatim below.

In view of the above, it is pertinent that, those IDs holding such ornamental posts, on the moral grounds should of their own resign from some of directorship before they are removed through the enactment of new company law and get humiliated later.

It would also be, not out of context to mention here that the Chairmen/ Chairperson / Nomination committees of those corporate should set an example of good corporate governance and ask these IDs, who are holding so many posts on the board to go immediately. Not only, the reputation of these companies is at stake, but it would lead to plummet of these companies' shares in the stock market thereby affecting the minority shareholders values, like in the case of Satyam.
Quote:
Super ( Human) Independent Directors
It is a human nature to be greedy at the expense of others. Some of these "Super (human) Independent Directors”, whose foremost duties toward the minority shareholders are being overlooked for the same reason. The IDs who are on the board of companies as high as around half century (50) will never be independent of mind( one of the main principle of Good Corporate Governance), thus not eligible & qualified to be on the board on behalf of these minor shareholders.

It is now the duty of the regulatory authority to intervene and make suitable amendments in sections 275, 276, 277 & 278 of company act and reduce the number of company an individual ID can hold to ten (10) instead of present fifteen (15). The regulatory authorities should also go a step further to include unlisted / private companies, in the forthcoming Indian Company Bill 2009 to curb gross misuse by some of these greedy Super (human) Independent Directors. Source: http://www.directorsdatabase.com/
Unquote
P R Chandna

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Thursday, August 13, 2009

Citi Forced to Bring in Consultant for Management Checks

Citi Forced to Bring in Consultant for Management Checks

U.S. regulators have made Citigroup to hire external consultants to consider whether its current management is up to the job of leading the troubled bank out of the financial crisis, reported the Financial Times.

It said people close to the situation said Citi had retained Egon Zehnder, a board advisory consultancy, to carry out an in-depth management review requested by the government after stress tests on banks in May. The push for Citi to enlist external help, led by the Federal Deposit Insurance Corporation and backed by other regulators, underlines authorities’ desire to keep Citi’s upper echelons under control after rescuing the bank with $45 billion...

The sources said Citi had to present a plan of action about possible managerial changes to the board and regulators by the time it reports third-quarter results in October. Citi has added eight new directors and replaced its finance chief in recent months

To read the article in Financial Times - Click Here
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Thursday, July 30, 2009

Indian Companies Bill 2009

Companies Bill 2009 likely to be re-introduced this week
Post Satyam fraud, which came to light after founder chairman of the IT firm confessed manipulating the books of accounts of his company for several years, the government is planning to further strengthen various provisions of the Bill.

It plans to make amendments including incorporation of class action suit and specifying accountability of independent directors in the Bill. Further, the government also seeks to make norms for auditors tougher and corporate governance norms more stringent...
To read the full story in "The Economic Times" dated 29th July 2009 Click Here.

Companies Bill 2011 as presented to the Parliament - To Read it  Click Herehttp://www.mca.gov.in/Ministry/pdf/The_Companies_Bill_2011.pdf
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Monday, July 27, 2009

IFC, Sebi, CII to sensitise directors on corp governance

IFC, Sebi, CII to sensitise directors on corp governance
IFC, an arm of the World Bank, will hold a series of workshops along with market regulator Sebi and industry body CII to sensitise independent directors about issues concerning corporate governance and the role they can play in preventing frauds like Satyam.
During the workshops, he said, "Independent directors will be sensitised about the need of corporate governance, the issues they need to focus on and the questions they should raise at board meetings."...
The workshop will help independent directors enhance their understanding of their role as a board member and their effective contribution in the working of the board, Kar said.
IFC's global corporate governance forum has partnered NISM to promote awareness of corporate governance in India. The forum also helps in disseminating good corporate governance practices, sponsoring research and supporting technical assistance.
To read the full story Click Here
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Saturday, July 25, 2009

India (SEBI) Clarifies Employees Stock Option Rules ‏

India's capital markets regulator clarified late Friday that employees of companies can subscribe to stock options even if they have sold the firm's shares during the previous six months.Employees, however, won't be permitted to buy the company's shares within six months of selling stock options, the Securities & Exchange Board of India said in a notice.It said while exercising employee stock options, the code of conduct framed by the company and "the fundamental principles for prohibition of insider trading as specified in the regulations must be complied with."Employees will also have to wait for six months since the last transaction in the company's shares to make an opposite trade, the regulator said.However, shares subscribed to under initial public offerings will only have to be held compulsorily for 30 days, it said.These rules can be waived for personal emergencies for sale of the company's shares if the reasons are recorded in writing and there is no element of insider trading. ...
To read the article Click here
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Monday, July 20, 2009

Record number of fraud cases in first half of 2009

Over 160 cases of serious fraud with charges in excess of £100,000 came to UK courts in the first half of this year, according to KPMG Forensic – the highest number of cases in a six month period in the 21 year history of its Fraud Barometer.
The cases had a total value of £636m which, if replicated in the second half of the year, would also lead to the highest value of fraud in the Barometer’s history (currently £1.2bn in 1995). Professional gangs were the most active perpetrators of fraud,..

To read the full article by KPMG Click Here.

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Friday, July 10, 2009

Auction mining rights

Auction mining rights
There is no other way to stop corruption...

...an industry body said to represent mining interests, which has come out in opposition to the policy of auctioning mining rights. This seems quixotic, when the mining of oil and gas fields has been accepted policy the world over. The ground rules under which contracts are signed are well established, and there is no reason why prospecting for coal or bauxite should be not be dealt with in the same way, and why proven reserves should not be auctioned to the highest bidder...

As it happens, the government decided more than a year ago that auctions are the right way to go—a stance that China too has taken. The policy adopted in March 2008 said that mining leases would be auctioned to actual users and that exports would be encouraged in value-added form (in other words, the country should export steel, not iron ore). It is not clear that the legislative changes required to give effect to this policy have been carried out; even if they have not, that is only a procedural hurdle...
To Read the complete article by T N Ninan in the Business Standard Click Here.
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AIG may seek millions in bonus payouts

AIG may seek millions in bonus payouts
The public was outraged the last time the bailed out insurance giant tried to pay its execs hefty bonuses. But AIG is reportedly talking about trying again.

To read the full story at Money CNN. com Click Here
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Thursday, July 9, 2009

EMPOWERMENT OF INDEPENDENT DIRECTORS

This has reference to the news item published in “The Hindustan times” dated 9th July 2009, titled “New Bill to define company directors’ role”. It is heartening to know that the government has taken an initiative to provide protection to Independent Director’s by coming up with amendment to the companies act.

The independent director’s (ID’s) in the present scenario of corporate governance in India are being appointed by the promoters/ CEOs, who are very powerful in the corporate world and thus the likelihood of theirs (ID’s) being independence is very unlikely. The protection as being suggested will be very short lived and will not provide a long term solution to the problem. We have to look for an holistic solution to these issue and the IDs need to be “empowered” rather than being protected. I would call it as bill for “EMPOWEREMENT OF IDs” . IDs need to be empowered or their roles well redefined to have a say in the CEOs succession, rather than CEOs appointing the IDs.

It is also pertinent to note here that many of the IDs (high official from government/ public sector) are being appointed by many companies immediately just after they retire from the active service, which also raises questions on IDs independence. It is a fact , the service rules of government provides for a “cool off period” for these high profile government/ public sector employees, but hardly being implemented. One of the criterion for selection/ rejection for an IDs from this category should also form part of the qualification of the IDs for appointment.

Beside, the above it is a well known fact that Indian shareholders are not proactive or are not able to assert themselves in discharging their role. It these category of people who are the most sufferer, when the company like Satyam or their CEOs indulge in unlawful activities. Shareholder activism is hardly heard off in India, but for recent few cases. It is essential that Indian shareholder also need to be empowered to discharge their role in tandem so as to bring about good corporate governance.

Last but not the least, the “Whistle Blowing” need to be given much more priority.
The above article was Published in Live Mint on 10th July 2009 to read the full article Click Here.



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Sunday, July 5, 2009

New companies bill set for budget session 2009

The new “Companies Bill 2009”, with stricter disclosure norms and provision for one-person corporate entity, will be tabled in the ongoing budget session of parliament.
A new companies bill is being re-introduced as the earlier version had lapsed because of dissolution of the previous Lok Sabha. The provisions in the proposed law would be in accordance with the changing economy. To rad the full News appeared in The Times of India 4th July 2009 Click Here.

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Sunday, June 28, 2009

"American Clean Energy and Security Act - 2009"

"American Clean Energy and Security Act - 2009"

Landmark legislation to curb U.S. greenhouse-gas emissions was approved by the House of Representatives in a close vote late Friday (26-06-2009) To Read the News on Wall Street Journal (WSJ) Click Here

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Saturday, June 20, 2009

Role of Independent Directors - Company Act

In a recent news article published in the Hindustan Times dated 19th June “ Law to steer independent directors

It’s an excellent step being initiated by the government to review the role of Independent Directors. In the Indian context, it is known that the many of the companies are controlled by the families and would like these to be handed over to their sons and daughters. The promoters may pursue interests that are not necessarily desirable from the point of view of the commercial success of the company. The promoters are all powerful making even the well qualified IDs, as in the case of Satyam having people like; Vinod K Dham, Mendu Rammohan Rao, Krishna G Palepu, Mangalam Srinivasan…, appear dwarfs and not of independence.

In most of the companies, it is the promoters who headhunt the independent directors – who are actually, friends, family members and even family lawyers, thus discouraging dissent in the board rooms and the board meetings are very cool and cozy and companies fail with respect to compliances for full disclosures and transparencies.

India’s corporate governance codes are on par with the best in the world what matters is keenness in implementation of these in practice. There are limits to legislations on corporate governance as a lot depends on the integrity and ethical values of various corporate players such as directors, promoters, executives and shareholders. The corporate governance is not only a “check-the-box” requirement but much more than to it.

Therefore, in the present situation questions are being asked ”Scrap the System of Independent Directorship in the Board?” - Is scraping of the system of IDs has the solution?
What are the role and responsibilities of an Independent Directors?
How far Independent directors have been successful in discharging their duties, looking at the recent episodes of ENRON, WorldCom, insider trading, subprime lending, Bear Stearn, SATYAM, Lehmans Brothers……?
Does the self regulatory mechanism has the solution?
How far SEBI or any other regulators been successful in controlling?

The role of the non-executive directors is to provide direction and oversight to ensure that the company protects and enhances the needs of the shareholders. They are the representatives of the shareholders but must represent every shareholder equally, never one type or group of shareholders.
The role of the independent non - executive is slightly more onerous than that of ordinary non - executives as they must also be completely free from any “conflict of interest”. It can be quite difficult when you are the only person in the boardroom who does not have a vested interest. Therefore, independent director must be sufficiently strong minded to withstand pressure, either overt or covert, to conform to the wishes of others. These are the ones, who are truthful, would stand up and face the corporate world, the weakling will resign, they are really not “qualified” to take up these roles. These breed of IDs, who are needed to be well supported by the system, who would manage to represent the shareholders' interests faithfully and well. The key issue is that, we are dealing with a social system in a confidential operating environment.
If the board is qualified, independent and ethical then one can achieve all the other attributes of good corporate governance. If the board is not qualified they may miss something, if they are not independent they may pursue other interests ahead of those of the company and if they are not ethical company will have trouble sooner or later even if they appear to provide the other attributes.
It is impossible for regulators to regulate so that only ethical and strong people get onto boards.
Furthermore, the shareholders will have to help themselves by ensuring that they question their directors at the AGM or in between, on the nature of behaviors in the boardroom:
• What skills each director brings to the board?
• How directors behave in the boardroom?
• What training needs were identified in the board performance review?
• What training has been delivered and what is planned?
• What specific governance/ director training do board members have?
Companies that disclose this sort of information are unlikely to recruit or retain a passive independent director. It is therefore, pertinent that the ethical side of directorship needs to be recognized and managed far more than what it currently is.
In view of the foregoing, it is a pertinent that a holistic system has thus to be evolved, involving all stakeholders, which would address all those aspects, which would achieve the best principles of corporate governance.














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Wednesday, June 17, 2009

AN EXAMPLE OF GOOD GOVERNANCE

Environment ministry to eject double agents:” – HT Times 17th June 2009
It is good to see an intiative has been taken towards good governance in one of the ministry. Our congratulations to the Hon’ble Minister for taking such an initiative of transparent working in his area of influence.
The government as well PSU service rules are very clearly defined issues like “conflict of interests” and “cool off period” and suggest not to take any pecuniary avantages from clients or private sector employment immediately after their retirement but are being coveniently overlooked in many cases.
Many of the ExCMD/ Directors/Scientists/ Government officers at the highest levels have joined either their clients or private sectors immediately after retirement or holding parallel offices. The initiatives taken by one ministry should be emulated by other ministries, so that an example are set for good governance in the country and those holding similar posts should either resign immediately or sacked or removed.
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Wednesday, June 10, 2009

How should board of directors handle Enterprise Risk Management?

The most extensive delineation of board responsibilities has been enumerated in the Canadian guidelines, which has identified beside other components the following two specific components:

1. Adoption of a strategy planning process.
2. Management of Risk.

The role of the board of directors in ERM oversight includes:

1. Determining a risk-adjusted corporate strategy and adequate metrics to track executive performance in the pursuit of such a strategy,
2. Approving a risk inventory and fundamental ERM parameters (such as risk measurements, risk appetite and tolerance levels) as part of the annual business plan.
3. Being about the effectiveness of designed procedures.

In determining its risk oversight structure, the board should conduct a preliminary analysis of corporate governance practices. Specifically, it should consider the following issues:

1. The independence, professional expertise, and time availability of board members; 2. The assignment of board oversight functions to specialized board committees;
3. The quality of the information flow between board members and management.

Delegating Responsibilities within the Organization: A growing number of companies have been assigning such leadership responsibilities to a dedicated chief risk officer (CRO). But companies should assess the time availability of existing executive positions, evaluate skills and expertise needed, determine the need to promote visibility and authority, and weigh a number of other issues before deciding whether such a position will prove a valuable contribution to the ERM efforts.

From the foregoing it is essential that, the board cannot and should not be involved in actual day-to-day risk management. Directors should instead, through their risk oversight role, satisfy themselves that the risk management processes designed and implemented by executives and risk managers are adapted to the board’s corporate strategy and are functioning as directed, and that necessary steps are taken to foster a culture of risk-adjusted decision-making throughout the organization. Through its oversight role, the board can send a message to the company’s management and employees that corporate risk management is not an impediment to the conduct of business nor a mere supplement to a firm’s overall compliance program but is instead an integral component of the firm’s corporate strategy, culture and value generation process.

Given the increased significance of the risk oversight role in the current risk environment, a company’s risk management system should function to bring to the board’s attention the company’s most material risks and permit the board to understand and evaluate how these risks interrelate, how they affect the company, and how management addresses these risks. It is important for directors to have the experience, training and knowledge of the business necessary for making a meaningful assessment of the risks that the company faces, however complicated they may be.

The board should also consider the best organizational structure to give risk oversight sufficient attention at the board level. In some of the companies, this may include creating a separate risk management committee or subcommittee. In others, it may be sufficient to have the review of risk management as a dedicated, periodic agenda item for an existing committee such as the audit committee, in addition to periodic review at the full board level. While no “one size fits all” it is important that risk management be a priority and that a system for risk oversight appropriate to the company be put in place.
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Friday, May 29, 2009

Scrap the System of Independent Directorship in the Board - Is this the solution?

What are the role and responsibilities of an Independent Directors?
How far Independent directors have been successful in discharging their duties, looking at the recent episodes of ENRON, WorldCom, insider trading, subprime lending, Bear Stearn, SATYAM, Lehmans Brothers……?

Does the self regulatory mechanism has the solution? How far SEBI or any other regulators been successful in controlling? Is scraping of the system of IDs has the solution?

The role of the non-executive directors is to provide direction and oversight to ensure that the company protects and enhances the needs of the shareholders. They are the representatives of the shareholders but must represent every shareholder equally, never one type or group of shareholders.

The role of the independent non - executive is slightly more onerous than that of ordinary non - executives as they must also be completely free from any “conflict of interest”. That means they cannot have any vested interests, whether by personal shareholding, contracts with the company or relationships with the management. It can be quite difficult when you are the only person in the boardroom who does not have a vested interest.

The independent director must be sufficiently strong minded to withstand pressure, either overt or covert, to conform to the wishes of others. These are the ones, who are truthful, would stand up and face the corporate world, the weakling will resign, they are really not “qualified” to take up these roles.

When looking at the failures it is tempting to claim that the independents have failed miserably in their duties. But, when we consider the vast majority of companies that survive, or even thrive, the failures are a miniscule percentage of the greater whole of the listed companies. In most companies the independents, supported by ethical non-executive and executive directors, manage to represent the shareholders' interests faithfully and well.
The key issue is that we are dealing with a social system in a confidential operating environment. Ethical and tough directors will stand up for what is right. Unethical or weak directors will cave in to pressure and may do the wrong thing or simply turn a blind eye whilst others do the wrong thing or resign and go. It is impossible for regulators to regulate so that only ethical and strong people get onto boards.
Shareholders can help themselves by ensuring that they question their directors at the AGM or in between, on the nature of behaviours in the boardroom:

· What skills each director brings to the board?
· How directors behave in the boardroom?
· What training needs were identified in the board performance review?
· What training has been delivered and what is planned?
· What specific governance/ director training do board members have?
Companies that disclose this sort of information are unlikely to recruit or retain a passive independent director.

It is therefore, pertinent that the ethical side of directorship needs to be recognised and managed far more than it currently is. It is observed that things are improving slowly, but there is still much to do to get all the deadwood cut out of the boardrooms.

This article was published in Live Mint Lounge - Wall Street Journal - an Hindustan Times business paper on Posted on 29th May 2009 9:21:01 AM
To Read the full article at the Live Mint Click Here



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