1334895952250satyam by g ramesh

7/30/2019 1334895952250Satyam by G Ramesh

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Governance and Control Instruments to

Minimize Moral Hazard

G Ramesh

IIM Bangalore

1G Ramesh, CPP - IIM Bangalore
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Martha Stewart Case - US

Stewart, 63, committed illegal insider tradingwhen she sold stock in a biopharmaceuticalcompany, ImClone Systems, Inc., on Dec. 27,2001, after receiving an unlawful tip fromBacanovic, at the time a broker with Merrill Lynch,Pierce, Fenner & Smith Incorporated.

The Commission (SEC) mentioned that Stewartand Bacanovic subsequently created an alibi forStewart's ImClone sales and concealed important

facts during SEC and criminal investigations intoher trades.



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Martha Stewart Case US

By selling when she did, Stewart avoided losses of$45,673.

Stewart now faces perhaps two years in prison

and the liquidation of at least half of her wealth(in the hundreds of millions of dollars), allbecause she managed to save herself $50,000selling.



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Martha Stewart Case

Wayne M. Carlin, Regional Director of the Commission'sNortheast Regional Office, said:

"The Commission simply cannot allow corporateexecutives or industry professionals to profit illegallyfrom their access to nonpublic information. Thecoordinated action announced today by the U.S.Attorney's Office shows that the consequences for thoseindividuals will be even greater if we uncover evidencethat they obstructed our investigation.



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Martha Stewart Case

One of the jurors commented gleefully that thisconviction was justified, in part, because it would send amessage to the "rich and powerful" that they can't getaway with such abuses.

Martha Stewart reported to prison one early Friday tobegin serving a five-month sentence for lying about astock sale, the federal Bureau of Prisons said.



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Rajat Gupta

Was once global head of McKinsey

Was Charged with Insider Trading on % counts

Colluded with Rajaratnam, a Srilankan

His disclosure of Inside Information concerningBerkshire Hathways $5 billion Investment inGoldman Sachs

Disclosure of Inside Information ConcerningGoldmans Sachs negative Interim FinancialResults

Disclosure of Inside Information Concerning P & GQuarterly Financial Results



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Rajat Gupta Case

The US Attorney is Preet Brarara

Rajat Gupta surrendered to court



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Your Take

How do you think it would have been handledin India?



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Satyam case

Its CEO Raju, Confessed that its balance sheet includedRs.7135 (US$1.5 billion) is non existent cash and bankbalances and accrued interest and misstatements.

It had inflated its 2008 second quarter revenues byRs.5880 million (US$ 122 million) and operatingmargins are less than a tenth of Rs.649 millions(US$135 million ).

Its Board members Prof Krishna Palepu, MangalamSrinivasan (Advisor to KSG), Vinod Dham, and Prof Ram

Mohan Rao resigned. TR Prasad and VS Raju resignedlater

In a week's time, Prasad has resigned from theboards of six firms, as per data available on thestock exchange website.



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Satyam case In a week's time, Prasad has resigned from the boards

of six firms as per data available on the stock exchangewebsite.

Listed in NYSE and Nasdaq class action suits filed.



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Datelines

o Dec 16th, 2008 Satyam proposes $1.6 billion (Rs.7000crores) to buy Maytas Properties and Maytas Infra.

Cancels it in 24 hours after shares in US plunged

Dec 17

th

, 08

It says deal put off because of investorsconcern

Dec 18th, 08 It sets Board meeting on Dec 29th toconsider share buy back

Dec 22nd Two independent directors say Board didntfully sign off on takeover valuation

Source: Corporate Governance failure at Satyam, VanitaYadav and CV Baxi, Asia case Research center.



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Datelines

Dec 26th One independent director resigns Dec 29th Three more independent Directors quit. Dec 30th Prof Palepu quits. Speculation of Private

equity interest in shares boosts prices Jan 2nd - Satyams say Rau family stake fell to 5.13% Jan 7th Raju resigns after admitting falsifying company

accounts. Shares plunge from 179 to 6.30.



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Datelines

Jan 10th - The New York Stock Exchange suspendedtrading in Satyam, though the Bombay Stock Exchangeand the National Stock Exchange of India have said theywill not being doing so. By mid-morning in Mumbai,

Satyam shares had slumped to 6.30 rupees, bringing thetwo-day decline to 91%, according to Bloomberg data.Asiatimes



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Satyam Statement on Corporate

Governance

o Satyam believes that sound Corporate Governancepractices provide an important framework to help theBoard of directors fulfill its responsibilities.It does so byadhering to and enforcing the principles of sound

Corporate Governance.

The principle of"Delighting stakeholder" is part ofeverything we do at Satyam



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CBI Charge Sheet

Rs.7136 crores plus supplementary charges of Rs.4739crores.

Auditors relied upon forged bank confirmation letters.Failed to verify the companys current account balances.

It found evidence of Talluri directing his team membersto, discontinue the procedure of obtaining theconfirmations from debtors and vendors in respect ofSatyam Computer Services from Sep 2007 onwards

The accused forged board resolutions and unathorisedlyobtained loans to the tune of Rs. 1220 crores for SatyamComputers.



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CBI Charge Sheet 5 get bail. Is Satyam case losing steam? CBI hasnt yet

filed charges relating to the siphoning of funds fromsatyam, nor has it begun its case.

The court has to begin to distinguish between crimes ofmagnitude and normal cases. We have been issuingnotices to the accused to appear before the court, but ifit passes a judgment against us, what can we do?

Amarjit Chopra, President, ICAI.



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Issues Satyam had the best of the Board,Governance, Auditors, Banks and Management.

Why do you think the scam happened?Was Governance the problem?Or, Deficient Institutional System?

Should it have been rescued?o Like the dogs that did not bark in Sherlock

Holmes story



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Issues

Post fraud what should the Board have done? Post fraud what should the Govt. have done?



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Audit Roleo Two senior auditors of PricewaterhouseCoopers (PwC)

yesterday confessed that they had received heavyamounts to deliberately overlook the fudging process inSatyam at the behest of its former chairman

o According to the accounting protocol, we should not haveapproved the books. But we colluded and approved thefigures. We were paid heavy amounts by RamalingaRaju," PwCs in-charge of Hyderabad office SGopalakrishnan reportedly said in his confessional

statement.o They also, intentionally, omitted to verify and scrutinize

documents and thereby helped in committing a brazenfraud with the Raju brothers and other directors, thesource said.



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Audit Roleo In connection with the multi-billion dollar Satyam scam,

the US auditing watchdog has barred from publicpractice two Indian auditors associated with the IT firm'sformer auditor Price Waterhouse Coopers.

o As per an order from the Public Company AccountingOversight Board (PCAOB), the two Indians -- Siva PrasadPulavarthi and Chintapatla Ravindernath - have beenbarred from being associated with any registered publicaccounting firm.



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Boards Role


Particulars

VP

Rama

Rao

Mangalam Krishna G Vinod K M

Rammohan TR Prasad VS Raju

Srinivasan Palepu Nigam Rao

Commission 1,00,000 12,00,000 12,00,000

12,00,00

0 12,00,000 11,33,333 11,33,333

Sitting Fees - 80,000 40,000 10,000 1,20,000 1,20,000 1,30,000

Professional

fee - - 79,51,000 - - - -

Total 1,00,000 12,80,000 91,91,00012,10,000 13,20,000 12,53,333 12,63,333

Stock

options

10,000

@ 5,000* 5,000* 5,000* 10,000@ 10,000@ 10,000@


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Thread of Reasoning Capital Market is Mirror Image of Democracy Shareholders entrust corporates to the Board

which in turn entrusts Management to manage

the company in the interest of theshareholders.

The entire focus is on ensuring alignment ofgoals between the Principal and Agent.

The Agent will try to maximize his benefit byplaying on Information Asymmetry



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Thread of Reasoning The Principal tweaks the information system tominimize asymmetry and the incentive systemto minimize the moral hazard problem.



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Principal - Agency Framework Divergent Behavior of Principal and Agent Aspects

Information Asymmetry

Opportunistic BehaviorNon Observability of Agent

Moral hazard : A moral hazard problem arisesif the principal can observe neither the agentefforts nor surrounding conditions.

Motivated to Mis-Represent privateinformation

G Ramesh IIM Bangalore


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Public Governance GOVERNANCE is " the traditions and

institutions by which authority in a country isexercised for the common good. This includes(i) the process by which those in authority areselected, monitored and replaced,

(ii) the capacity of the government toeffectively manage its resources andimplement sound policies, and

(iii) the respect ofcitizens and the state for theinstitutions that govern economic and socialinteractions among them" (World Bank)



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Corporate and Public Governance Corporate Governance Operates within the

Umbrella of overall Public Governance whichsets the terms of institutions and transaction.



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Song of the Sirenso Can we expect that the ruling class will

impose on itself a self denyingordinance? Can we expect it to disableitself, in the spirit of Homers Ulyssis,who tied himself to his ships mast, lesthe be tempted by the Song of theSirens?

DN Ghosh



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Thank You



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Corporate Governance

Definitionso the distribution of rights and responsibilities among

different participants in the corporation, such as, theboard, managers, shareholders, and other stakeholders,and spells out rules and procedures for making decisions

on corporate affairs: DN Ghosho the way in which companies are directed and controlled :

Cadbury

o the system ofchecks and balances, both internal andexternal to companies, which ensures that companies

discharge their accountability to all their shareholdersand act in a socially responsible way in all areas of theirbusiness activity..

Solomon



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What are the necessary and sufficient

Conditions?Information Asymmetry

High Quality Reporting High Accounting Standards Risk Management PracticesMoral Hazard Best Auditors Professional Board: Best of BreedIncentive Problems

Compensation Committees Listing in NYSE: Investors reward companies with betterreporting standards



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Aspects of Public Governanceo Participation - - Citizen centric

o Rule of Law

Institutions: Policy Making, Regulation, Justice,

Time is the crucial deliverables Transparency - Right to informationInformation is a Public Good vis a vis privategood

o Responsivenesso Equity

o Accountability (Gita Welch)

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Global GovernanceGlobal governance also implies ways of sharingresponsibility

between the public sector (regulation and

supervision),the private sector (self-regulation), and

civil society (democratic oversight)

Basel



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Observations by Amar BhideToo much controls can be counter productive

Rules that protect investors and the integrityof stock markets foster antagonistic, arms

length relationships between shareholders andmanagers.

Instead of yielding long term to shareholderswho concentrate their holdings in a fewcompanies, where they provide informedoversight and counsel, the laws promotediffused , arms length stockholding.



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Observations by Amar Bhide Institutional investors with fiduciary

responsibility usually refuse to receive anyprivate information from managers.

Investors prefer a cheap exit to a costly voice. Instead of yielding long term to shareholderswho concentrate their holdings in a fewcompanies, where they provide informedoversight and counsel, the laws promotediffused , arms length stockholding.



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Amar Bhide In both Germany and Japan, corporate investors and

intermediaries are able to reach deep into the innerworkings of portfolio companies to effect fundamentalmanagement change in the US, in contrast, when

large institutional investors suggest that they might liketo have some influence on management succession atGM - a company that has hardly distinguished itself fora skillful management they are met with icy rejectionand explicit warnings

Joseph Grundfest former SEC Commissioner



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Amar Bhide

Occasionally, greed, lax scrutiny, or ingenious fraudscould lead to serious losses. But should good publicpolicy sacrifice the interests of the many to guard

against the imprudence or bad luck of the few?



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Alternative Reforms

o Prudential Regulation

o Self Regulation

o Norms

oStandards

o Ratings

o Accreditation

o Third Party oversight

o Transaction cost of Information

o Policing and fraud detection still required


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o Rise In disequilibrium

o (dissatisfaction with existing supply of pub / pvt goods)

Supply of Goods (a new mix) Articulation of demand

(Demands for a new distribution)

Reaction to demand

(Govt. reacts to business)n

Reform Process Model



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Exante control Expost Mode Recurrence

(incentive mode) (penalties) (More control)

Bigger Scam

Is it a Converging equilibrium or Diverging Equilibrium



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Dirty Bomb: unlikely to cause many deaths dirty bombs are called weapons of massdisruption. Additionally, containment and

decontamination of thousand of panic stricken victims, as well as decontamination ofthe affected area might require considerabletime and expense, rendering affected areaspartly unusable and causing economic

damage.



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Irrational ExuberanceUltimately, in a free Society, we cannot protect peoplefrom all the consequences of their own errors. Wecannot protect people completely without denying themthe possibility of achieving their own fulfillment. We

cannot completely protect society from the effects ofwaves of irrational exuberance or irrational pessimism emotional reactions that are themselves part of thehuman conditions.

Shiller: Irrational Exuberance



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Thank You



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Reform or Regulatory Deficit?

o By and large, the structure is very weak in cooperativesand NBFCs for historical reasons, local practices, andmultiplicity of regulators and laws. Old private sectorbanks have very poor auditing and accounting systems.

New private sector banks generally good onaccounting, but poor on accountability. More modern andcomputerized, but less risk conscious. One thing which iscommon to all is that corporate governance is highlycentralized with very little real check on the CEO, who isgenerally also closely linked to the largest owner groups.

Boards or auditing systems are not effective.

o Bimal Jalan : Former Governor, RBI.


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Corruption

Public Oversight and Civil Society:Public Oversight and Civil Society:

OmbudsmanOmbudsman in Albania and Boliviain Albania and Bolivia Private Sector CoalitionPrivate Sector Coalition in Boliviain Bolivia DiagnosticDiagnostic Surveys andSurveys and NGONGO

monitoring in Ecuador and othersmonitoring in Ecuador and others

Governance Improvement in Practice:

Differentiated Strategies in Five Countries

Financial Controls:Financial Controls:ProcurementProcurement Reform in Bolivia,Reform in Bolivia,

Ecuador and GeorgiaEcuador and Georgia

Institutional and Civil ServiceInstitutional and Civil ServiceReform:Reform:TransparentTransparent PrivatizationPrivatization

in Ecuadorin Ecuador SalarySalary Reform in BoliviaReform in Bolivia Disclosure of AssetsDisclosure of Assets ininBolivia and GeorgiaBolivia and Georgia

Legal-Judicial:Legal-Judicial:Revamp ofRevamp ofSupreme CourtSupreme Court in Boliviain Bolivia Competency test and firingCompetency test and firing of judgesofjudgesin Georgia, Albania and Latviain Georgia, Albania and Latvia MediationMediation in Albaniain Albania

Economic Policy:Economic Policy:

Deregulation andDeregulation and DelicensingDelicensing in Boliviain Bolivia RevampingRevamping CustomsCustoms in Ecuador and Latviain Ecuador and Latvia Tax AdministrationTax Administration in Latvia and Ecuadorin Latvia and Ecuador Tax/CustomsTax/Customs Code Reform in AlbaniaCode Reform in Albania

www.worldbank.org/wbi/govern
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CommentsProblem is not systematic: India is notperceived like Russia it is neither everyonesdarling not the plague. Mauro Guillen

Companies in emerging economies havetrouble raising capital at low costs. Theliterature shows the reason why they want tolist in the US in spite of higher level ofgovernance is to raise capital at lower cost.

The fact that Satyam listed its ADRs in the US,but still had such a serious governanceproblems makes this case particularlydisturbing.



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Comments - Disown and Distance The reality is, at the end of the day, even as audit

committee member or as an independent director, Iwould have to rely on what the management waspresenting to me:

Singh, an independent director

Kamath: while the occurrence of such events in a majorcompany is a matter of deep regret, CII believes itwould be inappropriate for this to the basis ofquestioning of general standards in other companies.

This is a fraud that has been perpetuated over the years andtop management has been involved in it so many years,keeping the auditors in dark KPMG Rekhy.



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Corporate Governance

Definitionso the distribution of rights and responsibilities among

different participants in the corporation, such as, theboard, managers, shareholders, and other stakeholders,and spells out rules and procedures for making decisions

on corporate affairs: DN Ghosho the system ofchecks and balances, both internal and

external to companies, which ensures that companiesdischarge their accountability to all their shareholdersand act in a socially responsible way in all areas of theirbusiness activity..

Solomon



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Locus of Failure

-Governance Issues Board / Risk ManagementOverseeing / Appointments /

Stock Exchange Listing

Compensation

Agency Issues Wrongly Incentivized,

Misalignment / Goal Incongruence

Information and Reporting

Control Failure Operational / System Design

Performance Issues / Audits /

Reports

1334895952250satyam by g ramesh

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