Corporate Governance and Financial Scandals in India

Corporate Governance and Financial Scandals in India INTRODUCTION: This research will identify Corporate Governance in India and the reasons of its failures that lead to the financial scandals in India. As the big companies, Enron and WorldCom, illegal operations were disclosed; the worlds business came into shock. Many other companies in the world came under this attack like Parmalat in Italy, all had problems in their corporate governance. This showed that the whole world had a problem in their corporate governance. Unlike the developed countries, the developing countries had corporate governance as the main issue far before these scandals took place as corporate governance and the economic development are linked as this helps in development of financial system which results in increase of growth and reduction in the poverty. Thus research tells us why there are corporate governance failures in big organizations and explains the factors that influence the corporate governance like ownership structure, structure of company board, financial structur e, etc. LITERATURE REVIEW: 1.1.1 Corporate Governance: An overview Corporate Governance is an extensive term that refers that the rules, processes, responsibilities and the privileges are shared by the corporate participants. It basically says that how the investors assure that they get a return on their investment. It is the decision making committee by which the managers work on their duties in order to maximize investors wealth. Acc to Keasey et. al.(2005) approaches Corporate Governance as, â€Å"Corporate Governance has two requirements, micro level and macro level. At the micro level it needs to ensure that the firm, as a productive organization, functions in pursuit of its objectives. Thus if we follow the traditional Anglo-American conception of the firm as a device to further the well being of its owner-shareholders, good governance is a matter of ensuring that the decisions are taken and implemented in the pursuit of shareholder value. At the macro level corporate governance, in the words of Federal Reserve chairman Alan Greenspan, Ã¢â‚¬Ë œhas evolved to more effectively promote the allocation of the nations savings to its most productive use. â€Å" A good corporate governance should aim at long term benefits to the shareholders and other stakeholders. It can reduce the national financial crises. Corporate governance and currency depreciation have inverse relationship. Asian crisis of 1997 is one example of poor corporate governance norms. The manager should be working in the interest of the shareholders. Managers have the control over the business and may not act in the benefit of the shareholders. This is the common problem all over the world. On the whole a good corporate governance can help in preventing the financial scandals that happened in the world. 1.1.2 Corporate Governance in India: In India, corporate governance was not understood till early 1990s. Indian legal system is based on the English common law and gives the highest protection to the investors and to lenders as well. The corruption rate is very high in India. The most important development in corporate governance and investors protection in India is the establishment of the Securities and Exchange Board of India in 1992,(Chakrabarti et. at.,2007). It was established to monitor the stock trading which helped in making the basic rules for the conduct of corporate in India. Reforms were made to make the people rely more on market than on government. The public sector was targeted inorder to make it more efficient and to bring out the government holdings for sale to the public. Banking sector reforms were also made to bring them to the international levels. In 1998 a code- Desirable Corporate Governance in India and the companies followed it,(Mallin,2010). Many who didnt follow it experienced losses and end ed up in losing the confidence of people. SEBI also made a committee on corporate governance in 1999 headed by Shri Kumar Mangalam Birla and report was published in 2000,(Mallin,2010). This concentrated on the capital markets growth. The code is to be followed by the both public and private sector companies. The code tells about the structure of the company, the role played by them and what is everybody entitled for. i.e. Board of Directors, Nominee Directors, Chairman of the board, Audit committee, Remuneration committee, Shareholders, how corporate governance is implemented, management of the company and the board procedures. Though India has one of the best corporate governance laws but the implementation of them is very poor. In India, the main business type is the public limited companies. The legal system is the English Common Law, the structure of the Board is unitary and the ownership is basically family ownership or corporate but now the institutional investors ownership is increasing. 1.1.3 Financial Scandals: The corporate governance is influenced by the ownership structure, the structure of company boards, the financial structure and the institutional environment. If any of these doesnt work properly then the scandals are prone to happen. The people choose the board of directors, which further appoint managers for different work who actually work daily in order to maximize shareholders wealth. Its the board of directors that decided the corporate objectives and the managers are the one who carry them out. The main reasons that cause corporate governance to fail are as follows: the most important is that the work done is not watched properly and is very weak. There is not much respect for the shareholders, and moreover the management has the complete authority who works for their own benefits rather than the shareholders wealth maximization (KPGM, 2009). The few corporate scandals that have taken place all over the world are like Enron (USA), WorldCom (USA), Satyam (India) and many more ( Mehta et. al). RESEARCH QUESTIONS AND OBJECTIVES: The research aims to find the corporate structure and its role in fulfilling the objectives of an organization. The research about the present corporate governance structure and the changes it has come overtime and further any changes required according to international norms. The main objective of the research is as follows: How can corporate governance be more stringent to steer clear of scandals? How important is the Board structure and the Audit committee on the board for good Corporate Governance? Is there any alteration required in the current structure of corporate governance to make it work more efficiently? METHOD: The research is to be done, in particular, for the detailed information on the corporate governance and the reasons of its failure which result in the fall of huge companies based on the following two reasons i.e. the Board structure and the Audit committee. The qualitative approach will be used. The primary data collection for the Board structure will be done based on two companies i.e. Tata Consultancy Services (TCS), India and Infosys Technology Limited (India) which can be compared to the one of the major company of India, Mahindra Satyam, which failed due to poor corporate governance. All three are the software companies. Taking direct interviews with the high officials on the management committee will be of helpful in finding out the deep structure and changes that are required for the corporate governance to work more efficiently and how does it still help the companies to perform up to their shareholders expectations. The Board structure can be discussed by knowing the number of members on the board, their independence. Auditors play an important role because due to their reports people put faith in the company. The audit members will be found and the actual knowledge of the members will be collected from the CMIEs prowess database which will help in telling whether the committee has enough knowledge in order to fulfill the shareholders demand or not. Secondary data is the data in which researcher is not involved in the collection (Dale, Arber, and Proctor 1988). The secondary data collection also got some advantages as cost and time, high-quality data, opportunities for longitudinal analysis, more time for data analysis and reanalysis may offer new interpretations (Knight and Latreille, 2000). Secondary data will be collected from company website, annual reports, books, journals, newspapers and magazines. The data collected as secondary can provide important information about the company and can prove supportive in research. 3.1 ASSESS RESEARCH QUALITY: Reliability: The reliability of interview can be ascertained by ensuring that all questions are clearly understandable to all the interviewees and the replies received can be coded explicitly. The answers received from interview should make sense and must prove helpful to the research. The self-completion questionnaire must be filled by employees without any pressure from their managers. Therefore, a pilot test must be conducted before issuing of questionnaire (Saunders et al., 2003). Validity: The validity is concerned with the issue that whether the data collected is related to what it is expected to be. According to Saunders et. al(2003), validity is related to a question of casual relationship between two variables? The research will be conducted from February 2010 to May 2010. And there will be direct contact with senior managers in DAIPL to keep updated about any change in their motivational strategy or any change made internally. This will ensure the validity of the research done. Ethics: The code of ethical conduct stated that it is the responsibility of the researcher to assess carefully the responsibility of harm to research participants, and, to the extent that it is possible, the possibility of harm should be minimized (Bryman and Bell, 2007). Therefore, research conducted will be done only when managers and employees are willing to participate in research. The names of all participates would be kept confidential and not revealed at any reason. The questions in the interview will not be formulated in manner that they show any participants identity. Accessibility: The researcher here is been granted the right to access and publish all the findings that are relevant to all ethical requirements.