Problems in Corporate Governance -
September 28th, 2010
Problems in Corporate Governance
Public sector units :They are merely extended arms of government and total administrative control is in the hands of ministry.
For example: selection of CEO board has very little say, decision is taken by the government through the concerned ministry with the help of public enterprise selection board.
The board of governor can neither fire nor can they alter his compensation package. Even in auditing the major role is of CAG (controller and auditor general). Board is still powerful on paper and some of the operating issues have to be bought through board for decision making.
Multinational corporation:MNC to raise the foreign stake sometimes issue the shares at very discounted price.
Another one is when the foreign parent has two subsidiaries in India of which it holds higher stake (lets say 100%) in one and lower (lets say 51 %) in another one. MNC transfers shares from 1 subsidiary (51%) to another (100%) at much discounted price.
This implies large loss of minority share holder of the company who has contributed to the investments that were made in the past to build up these businesses.
Domestic private business firms :
Black money: A large parallel black money economy exists in India where transactions are carried out in cash and are not recorded o books of accounts. This is accounted for cheating the government and minority share holders
Mergers and acquisition: the valuation of 2 companies can be biased and the owner may secretly acquire large position.
Corporate misconduct is
Fraud committed by internal entities to willfully erode shareholder value
Not just restricted to malpractices in accounting, reporting, operations and management conduct
Product of Corporate greed and culture, Pressure, opportunity and rationalization
Corporate misconduct has come back into limelight with recent corporate failures
• Whether got into off-the-book partnership and innovative financial structures to hide debt and improperly inflate earnings
• Corporate frauds and allegations of document shredding
• Market cap down from $80 billion to $268 million
• Whether overstated EBIDTA by over $3.8 billion and booked $7 billion in expenses as capital expenditures
• SEC is examining whether it used questionable methods to book sales, classify assets and account debts
• Market cap down from $115 billion in 2000 to < $1 billion
• Whether failed to properly disclose $2.3 billion of guaranteed loans to members of its promoter (Rigas) family
• Stock prices collapsed 99.6% to $0.05 per share
• Whether it evaded sales tax and used corporate funds for personal benefits of the CEO
• Whether improperly created 'cookie jar‘ reserves to boost profits; and 'spring-loaded‘ earnings from acquisitions by accelerating pre-merger outlays
• Market cap fell by over $100 billion
• Whether it sold its telecom capacity in a way that artificially boosted its 2001 cash revenue?
• Sold stocks worth $700 million soon before bankruptcy filing
• Recorded $12.4 billion in revenue from the company's pharmacy- benefits unit over 3 years that the subsidiary never actually collected
• Artificially inflated revenue and improperly rewarded top executives
• Overstated revenues in 2000 and 2001 thru ‘round trip’ energy
• Transactions to cut taxes and artificially increase cash flow
• Suspected improper accounting for vendor allowances
• Adjusted fiscal 2000 revenues by $679 million.
Several more names, respected world-over
• AOL Time Warner, Bristol-Myers, Elan,Halliburton, ImClone Systems, Micro strategy, Mirant, Network Associates, PNC Financial, Qwest, Reliant Resources, Rite Aid, Vivendi Universal, Xcel Energy, Xerox
Billions of dollars lost in market capitalization, wiping out life savings of common man on the road - Source: Wall Street Journal