THE STORY BEHIND THE END OF TWO CONGLOMERATES

A Reality Check On Corporate Governance Of Enron Corporation & Satyam Computer Services
At the core of the debate on corporate governance is the need to ascertain whether CG is needed only to prevent paranoia caused by non-adherence to SEBI guidelines or it is part of the larger goal of self-regulation to achieve long-term growth and well being

The concept of "Governance" dates to

ancient human civilization whether it

was the Indus Valley Civilization or the

Mesopotamian Civilization. In a modernday

scenario, "Corporate Governance" is

"The system by which companies are directed and

controlled" (Cadbury Committee, 1992). This article

focuses on the epic meltdown of two large corporates

in the light of inadequate corporate governance and

lack of fiduciary duties by the Board of Directors.

The article further analyzes the need for unification

of long-term goals, whilst maintaining culture,

long-term goals, and the foremost aspect which is

protection of investors.

While the rest of the world was engulfed in the

"Global Financial Crisis" and India was in its

phase of economic liberalization in 1991, the

year 1992 saw its first step towards corporate

governance by the recommendations provided

by the Cadbury Committee (headed by Sir Adrian

Cadbury) in its report published on December 1,

1992. The recommendations focused on "Control

and reporting functions of boards as well as the

vital role played by auditors in a corporate setup.

The major epiphany behind the recommendations

was to "Establish a set norm which would facilitate

a control over the business while preserving the culture and

spirit of the organization" (Cadbury Committee, 1992). This

report has set a true fabric for governance of corporates

through concepts of accountability, responsibilities of the

board of directors, integrity, and building of trust among

shareholders in a corporate setup across the United

Kingdom. The committee's report was well founded and is

often treated as a treatise for setting up a framework for

corporate governance in several nations.

While the Cadbury Committee provided for guiding principles

on corporate governance, the Old Wild West saw a rapid rise

as well as downfall of Enron due to several frauds, such as

embezzlement of funds, committed by directors at Enron,

which ultimately led to its demise. Enron was established in

1985 following a merger between Houston Natural Gas and

Inter North. After the merger of the two large corporations,

Kenneth Lay was appointed as Chairman and CEO of Enron

Corporation.

By the mid-nineties, Enron began exploring and investing

in a host of projects which helped it reach its zenith¹.

Often known as the "Darling of Wall Street" in the 1990s,

Enron had established itself as one of America's largest

corporations of all times. In fact, the United States had

witnessed its very own golden era of capitalism in the late

1990s, where looming profits were reaped by all ambitious

corporations, with little government interference. Sadly, in

the year 2000, the dot-com bubble burst and so did Enron's

success bubble. To protect the company from getting buried

under its own weight, then CFO Andrew Fastow devised

a mechanism to create SPVs and manipulate accounting

reality. In addition to Fastow's mechanism, Arthur

Andersen LLP, one of America's largest accounting firms,

was accused for giving a clean chit to activities conducted

by the corporation.

In 2001, both Enron and Anderson LLP were prosecuted

for reckless behavior and lack of transparency and mala

fide intention of fabricating accounts, and the company

subsequently filed for its bankruptcy. The corporate scandal

was so huge that the bankruptcy of Enron has still left its

mark on the history of corporate governance in the United

States of America due to the lack of attentiveness of the board

of the company. The New York Times was quoted saying

"The incuriosity, inattentiveness, and unresponsiveness of

the Enron Board led to the staggering failures of conduct

that no law can fully prevent."²

Thereafter, the SEC announced that it was investigating

into the affairs of the company at length. The financial

Armageddon caused by the collapse of Enron and its

disastrous impact on shareholders and employees of the

company led to the establishment of vital legislation and

formation of the "SARBANES OXLEY ACT," often known as "SOX." The act was drafted by then Senator Paul Sarbanes

and representative Michael Oxley to combat the systemic

corporate frauds caused by companies. The legislation for

the very first time in the history of the US laid a proper

framework to protect the interest of the shareholders while

laying down responsibilities of the board of directors and

auditors and securing the interest of investors as paramount

consideration.

The legislation has very minutely contemplated the efficacy

of "Corporate Governance" through³:

1. Identifying missing gaps in the accounting practices of

   corporations.

2. Making corporate governance in corporations stringent.
3. Laying down set norms for the role of board of directors

   and increasing their accountability.

4. Ensuring transparency in the functioning of a

   corporation.

5. Imposing stringent penalties to combat executive

   malfeasance.

6. Creation of "Company Accounting Oversight Board" for

   regulating corporate behavior.

Even though SOX has often been critiqued as being "Archaic,"

"Lacking competitive edge," and paying disregard to "Say

on pay for executives" for corporations, till date, it seems to

be a very important legislation for setting standards for a

methodical corporate governance norm in many developing

countries such as India, Bangladesh, Pakistan, etc. SOX

has been quite beneficial and has been the quintessential

element for the formulation of legislations for corporate

governance in India.

In 2009, India witnessed a mammoth of a scandal

where Satyam Computer Services, one of India's leading

software companies, went bust in its own drive for

capitalism. The scandal is regarded as "India's Enron."⁴ The

company's founder and chairman, B. Ramalinga Raju, had,

after years of manipulation of the accounts of the company,

confessed to a $1.47 billion fraud on its balance sheet,

which he and his brother, Satyam's managing director,

disguised from the company's board, senior managers,

and auditors for several years. The scandal was strikingly

like Enron, where auditors of the company were also held

responsible.

The scandal draws attention to two major flaws, i.e., failure

of transparent⁵ accounting and lack of responsibility of

the board of directors of the company. India saw its first

proper step towards "Corporate Governance" through the

amendment of the Indian Companies Act, 1956 in the year

2000 and the Confederation of Indian Industries (CII) in

the year 1998, which came out with a "Code of Corporate

Governance" for listed companies which acted as a guide

for corporates to voluntarily adopt principles of good governance. Among the many recommendations were

the composition of board of directors, forming of audit

committee, and formation of Clause 49 of the SEBI Act.

Clause 49 has earmarked stringent requirements under

various heads with a focus on the agency model of corporate

governance. The Clause reforms

included detailed rules regarding the

role and structure of the corporate

board and internal controls and

deal at length with 1) Appointment

of independent directors in board;

2) Appointment, composition,

and powers of audit committee;

3) Functioning of various internal

committees; 4) Compensation to be

paid to independent directors; 5)

Adherence to internal controls by

the board of directors and other top

executives; 6) Various important

disclosures; and 7) Whistleblower

policies.

Learning from the experiences

of failure of Enron and Satyam

and their lack of "Governance" in

corporate establishments, it is a publicly accepted rule that

all establishments need "Legal Framework" under which

they are required to operate for their holistic well-being

and existence. The round table conferences on corporate

governance have provided for an equipoise situation for the

right kind of governance of a company, which can be made

use of in the Indian context as enumerated below:⁶

Firstly, any company can choose to instill the purpose

as well as long-term focal point by incorporating their

governance mechanism in the Articles of Association.

Secondly, listing out fiduciary duties and enhancing the

role of the board of directors, key managerial personnel

(definition as per Indian Companies Act, 2013) along

with assessing sustainable growth achievement goals,

and stakeholders' interests. Thus, there needs to be

requisite clarification and articulation on the roles and

responsibilities of the boards of companies.

Thirdly, each company should have proper and stringent

accounting, reporting, monitoring, and audit structure

within the organization. The internal control and dissection

of affairs of a company should be stimulating that various

institutional investors can track the growth and treat such

reports as "Key performance indicators" for investing with

confidence. Further, strengthening of punitive measures

for negligence and omission of duties can be additional

steps towards ensuring strict governance of large and small

corporates.

Fourthly, there should be envisaging of the "Independence

of the Board" such that directors or executives of a company

are appointed independently without the intrusion of a

promoter of the company. This mechanism is likely to

ensure a structure of "Working for the company" as opposed

to "Working for the promoter." In the present scenario of

corporate governance, it would also

be beneficial to have an Independent

Regulator to govern all corporates

and their executives. Further,

such independent authority can

be vested with additional powers

of appointment, remuneration of

directors, and executives of all

companies.

Fifthly, in the real world, the

current framework under the

implementation of corporate

governance by companies seems

merely "Lip service" or "Box

ticking." The apparent focus

of the companies still seems to

be on individual goals and not

stakeholders' goals.

Thus, despite numerous regulations, one needs to ponder

as to whether a company needs to have "Corporate

Governance" only due to the paranoia caused by nonadherence

to SEBI guidelines or is "Self-Regulation" the

key area of development for long-term growth and wellbeing

of a company.

BIBLIOGRAPHY

1. https://www.thebalance.com/g00/sarbanes-oxley-act-of-2002-3306254?i10c.referrer=https://www.google.co.in/nt of their businesses.ntial spirit of enterprise.governance as a whole
2. https://corpgov.law.harvard.edu/2009/07/29/us-corporate-governancetoday-a-reshaping-of-capitalism/
3. https://www.thebalance.com/g00/sarbanes-oxley-act-and-the-enronscandal-393497?i10c.referrer=https://www.thebalance.com/g00/sarbanes-oxley-act-of-2002-3306254?i10c.referrer=https%3A%2F%2Fwww.google.co.in%2F
4. http://www.icai.org/post.html?post_id=2937
5. https://dealbook.nytimes.com/2011/11/25/another-view-sarbanes-oxleyand-the-legacy-of-enron
6. http://www.reuters.com/article/us-financial-sarbox-idUSBRE86Q1BY20120730
7. http://www.indialawjournal.org/archives/volume2/issue_4/article_by_rahul.html
8. http://www.business-standard.com/article/companies/sarbanes-normsguiding-clause-49-implementation-105111401044_1.html
9. http://www.ialm.academy/need-better-corporate-governance/
10. https://www2.deloitte.com/in/en/pages/risk/articles/governance-101.html
11. http://www.investopedia.com/updates/enron-scandal-summary/
12. http://www.purposeofcorporation.org/corporate-governance-for-achanging-world_report.pdf
13. http://www.economist.com/node/12898777

Disclaimer – The information contained in this article is for general guidance and the views expressed herein are personal. Information is provided with the understanding that the author is not herein engaged in rendering any legal advise. Every attempt has been made to ensure that the information contained in this article has been obtained from reliable sources..