Corporate Governance: Necessity for Companies
(Comparative Analysis of Infosys and Satyam)


By

Ms. Hemlata Manglani
Lecturer
Amity Business School
Amity University Rajasthan
Jaipur

Mr. Sumit Srivastava
Lecturer
Poddar Institute of Management Studies
Poddar College
Nawalgarh
 


Introduction

The last few years have seen some major scams and corporate collapse across the globe. In India, the major example is Satyam which is one of the largest IT companies in India. All these events have made stake holders realize the urgency and importance of good corporate governance. Before investing money in any company people are quite concerned how companies are being managed. International organizations like IMF, WTO and World Bank are also insisting on transparency. All this has made Corporate Governance and transparency up the public agenda.

Good Corporate Governance makes for good business sense. It increases confidence of shareholders in the company. This leads to better stock prices. Research has shown that the good Corporate Governance brings down the cost of capital for the company. Good disclosure practices lead to a more liquid market for the company. This lowers cost of debt for the company. Thus the CEOs of today, there is a clear business case for complying with principle of good Corporate Governance.

In the era of Globalization & Liberalization market forces plays a crucial role. We know that liberalization in emerging economy has made access to foreign funds easier. Availability of foreign funds will lower the cost of capital. It is quite understood. All companies will like this to happen, but the international lenders will be careful. They will expect that the companies they lend to follow good Corporate Governance. These lenders will demand transparency.  These factors force the companies to modify their behavior and values to meet the norms of Corporate Governance.

It is critical for any company that people they recruit believe in the company in the company's values and takes in those values. For Example: Infosys group lays lot of emphasis on its values, integrity and transparency, while recruiting people in its group.

Transparency is critical for good governance. Without transparency, new laws and governance codes can do little to boost investor's confidence. Various steps like use of standardized accounting practices, free flow of information and clear policies are needed. Transparency has its cost and benefits. If we talk about benefit there are increased shareholder confidence, reduced costs of capital. Companies with strong corporate governance records have found it easier to sail through bad time and secure support of all stakeholders even in the companies' bad time.  

What Companies should do?

Companies need to take steps to prevent harm to their reputation and also pacify the activist groups. The companies should take basic steps like meeting all corporate norms and regulations. They should operate in a transparent manner. Their actions and policies should be transparent so that the activist groups can be reasonably satisfied on how the company is managed. There should be free flow of information. The company should also undertake some PR exercise to project a good image. They should also look into the possibility of accepting some of the suggestions of activist groups in their policy framework. A member of the group can also be included in decision making to get the other side's view.

Companies these days reward employees for meeting sales targets, achieving profits, presiding over takeovers. Somewhere down the line we have neglected ethical conducts and transparency. Reward for people with excellent conduct and ethical behavior should be there. Those who achieve excellent result but by the doubtful way should face negative consequences not rewards. This may not sound profitable but long term reward for good Corporate Governance will be much higher. There is also need of proper succession planning for the employees in the organization.

Enforcement of the Code of Corporate Governance

In the late 1990s, the Confederation of Indian Industries (CII) published a code of corporate governance. In 1999, the Securities & Exchange Board of India (SEBI) appointed a committee under the chairmanship of Kumar Manglam Birla to recommend a code of corporate governance.

Corporate Governance Practices by Infosys

Infosys is the high priest of corporate governance. Infosys had accepted the recommendations of both the CII and Kumar Mangalam Birla committee. This part of the paper provides an overview of corporate governance practices followed by Infosys.

Infosys has an executive chairman and chief executive officer (CEO) and a managing director, president and chief operating officer (COO). The COO is responsible for all day to day operational issues and achievements of annual targets in client satisfaction, sales, profits, quality, productivity, employees' empowerment and employee retention.

The CEO, COO, executive directors and the senior management made periodic presentations to the board on their targets, responsibilities and performance.

Infosys adopted the tough US Generally Accepted Accounting Practices (GAAP) many years before other companies in India did. To maintain transparency, Infosys provided details on high or low monthly averages of share prices in all the stock exchanges on which the companies share were listed.

Narayan Murthy believed in commitment to values, ethical conducts of business. He said, "Investors, Customers, Employees and Vendors have all become sharp, and are demanding greater transparency and fairness in all dealings." He also made a clear distinction between personal and corporate funds. Founding members took only salaries and dividend and did not have other benefits from the company.   

Achievements of Infosys for Its best CG practices

By the late 1990s, Infosys Technology Ltd had clearly emerged one of the best managed companies in India. Its corporate governance practices seemed to be better than those of many other companies in India.

Because of good corporate governance practices, Infosys was the recipient of many awards. In 2001, Infosys was rated India's most respected company by Business World. Infosys was also ranked second in corporate governance among 495 emerging companies in a survey conducted by Credit Lyonnais Securities Asia (CLSA) Emerging Markets. It was voted India's best managed company five years in a row (1996-2000) by the Asia money poll.

In 2000, Infosys had been awarded the "National Award for Excellence in Corporate Governance" by the Government of India. In 1999, Infosys had been selected as one of Asia's leading companies in the Far Eastern Economic Review's REVIEW 2000 survey and voted India's most admired company by The Economics Times.

Conducts of Satyam: Mockery of Corporate Governance

When we study the case of Satyam we find it very socking and unbelievable. How a person can dare to take such step? How it could happen? Where was the law and codes of Corporate Governance? In this part of the paper we will discuss, what was the complete story of Satyam scam? How they had slapped on the face of Corporate Governance?

"Satyam" it is a Sanskrit word which means the truth but the Satyam case is one of the biggest frauds in India's corporate history. B. Ramalinga Raju, Founder & CEO of Satyam Computers announced that his company had been falsifying its account for years.

It proves that Satyam Computers had been feeding investors, shareholders, clients and employees a steady diet of asatyam (Untruth) 

January 7, 2009 will go down as a black day in corporate India for this was the day India was hit by its first market scandal. Ramalinga Raju founder & former chairman of Satyam, admitted to fraud and inflating the revenue and costs and resigned from the company and the board. He admitted that he falsified the accounts books at Satyam.

What had socked analysts is that the money, that supposed to be fictitious later, had been recorded in Satyam's balance sheets and books of account that had been audited by the internationally reputed firm of auditors, PriceWaterhouseCoopers (PWC).

A most alarming aspect that of the episode was that Raju acknowledged that his company's financial records had been fudged and manipulated for the last several years. In his letter Raju wrote that "It was like riding a tiger without knowing how to get off without being eaten".    

The down fall of Raju began when Satyam attempted to acquire two companies controlled by his sons- Maytas Properties and Maytas Infrastructure for 1.6 billion dollars in order to compensate the holes in his books of accounts.  

The entire episode of attempt to purchase of Maytas by Satyam was nothing but making mockery of the concept of corporate governance in India, the very definition of which ie. Fairness, transparency and accountability have failed here. Satyam Computers episode has raised a question on the role performed by independent directors and whether they all need to be regulated. This case is a eye opener of the extent to which the independent directors are really performed well their role.

Conclusion:

Now, if we conclude the complete paper we can easily compare both the companies' honesty level, accountability level and off course transparency level. These are the pillars of Corporate Governance.

When we talk about Infosys, We find it strong in all aspect and above all the company thinks of its employees first then about anything else. Because, the founder of the Company Narayanmurthy believes that employees are the biggest assets for any company.

Nevertheless, if we talk about Satyam, we find holes everywhere. Company's founder Ramalinga Raju, Never thought about employees and the code of Corporate Governance. He always thought of fraud. First he made a mistake that he falsified the books of accounts for last several years. And then he made another mistake for trying to overcome the first one by attempting to purchase Maytas infrastructure and Maytas Properties.

So, we find that Infosys had not only acquired a best position for it self but by its best Corporate Governance practices it has made a great perception of Investors about Indian companies in International market.  

On the other hand Satyam Computers had lost the trust of itself and other Indian companies in the International Market by its bad Corporate Governance conduct.

So, it can be said that fulfilling the needs and requirements of Corporate Governance is not the matter of choice but it's a compulsion for companies.

Ethics, Efficiency and Accountability are most important for long term survival and prosperity of any organization. So, Companies should follow the way Infosys has followed and still following not the way which Satyam took.
 


Ms. Hemlata Manglani
Lecturer
Amity Business School
Amity University Rajasthan
Jaipur

Mr. Sumit Srivastava
Lecturer
Poddar Institute of Management Studies
Poddar College
Nawalgarh
 

Source: E-mail August 24, 2009

          

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