Corporation

Introduction

     A bond writing agency called Moody’s had downgraded TELUS credit rating. The action itself had effect of Can$ 6.4 Billion in debt. The Moody’s came to this eventual debt rating by the means of largely unexpected notches from investment grade to speculative grade. The concerns Moody’s had on this rating action was that TELUS was going to experience negative cash flow which would damage its ability to pay the debts until 2004. Robert Mc Farlane, who was the then CFO of he TELUS Corporate had immediate steps to counter the situations. In this paper its apt to have greater look at how the TELUS capital structure is in comparison with other telecoms and asses little bit on TELUS financial condition. Then we will also look into the specific actions could be taken by Mc Farlane to assure investors.

The TELUS capital structure compared with others.

Firstly let us look into the situation before the competition period. There were companies which provided telecommunication cervices as their monopoly. These companies were dominating the industry. They were the companies called Incumbents. In the year 2001, 78 percent of industry revenues were to the credit of these provincially based or regionally based incumbents. And the smaller ones served less densely populated municipalities. As the time went on the competition had also increased and adding to  the woes was the intervention of CRTC (Canadian Radio-television and Telecommunication Commission), which is the independent agency responsible for regulating Canada’s broadcasting and telecommunication industry, in the year 1990 and 1992, life has become harder for the telecommunication giants.

TELUS was formed in the year 1999 with the merger of two firms, they are namely the Alberta based TELUS and BC TELCOM. In July 2000 TELUS had established a new strategic intent which was supported by six strategic imperatives. In this, they stressed significantly on the contemporary demand of business that is voice and wireless on the IP platform. The firm have decided to relentlessly focus on data, voice, IP and wireless growth.

 So TELUS began to invest significantly on a national fiber-optic network. They have invested $6.6 billion in acquisition of Clearnet Communications and acquired a 30 percent in Quebec Tel. It was a time when other telecommunication companies were finding the long-distance less attractive and they were all in pursuit of the same cause that is the possibilities of IP voice communication. The capital investment in the industry was expected to accelerate at that time. It is important to remember that 2000 was the year when the dot com companies had a collapse. In the following year the 9/11 tragedy brought the market further down. TELUS began to enjoy wider attention with the Clearnet acquisition which was done with the arrangement of debt from consortium Canadian banks. And now, TELUS had stated publicly that it indented to reduce its debts to capital ratio within almost three years of its Clearnet acquisition. During 2000 and 2001 merger investment was made to digitalize and upgrade its western Canadian cellular system. The year 2001 seemed to be the peak year of capital investment. They spend $2.6 billion almost the 375 of their revenue that year. They company had in mind that, unlike the other giants, they have invested handsome capital up in front that they capital investment in the years to follow would be reduced. And that would be roughly 15 to 20 per cent of their annual income.

They also raised money by selling its yellow pages to Verizon and selling a small leasing company and some real estate. TELUS initiated a phased operational efficiency program a non-cash  restructuring charge of $198.4 million was recorded in the first three months of 2001. Meanwhile TELUS arranged a 2.5billion bank credit facility and raised more than can$6.4 billion in multi year public debt. After a year TELUS faced a problem in renewing the $2.5 billion credit due to the bankruptcy of many in the industry including Teleglobe. In few weeks the TELUS has increased its accounts receivable securitizing.

TELUS financial condition & the positive and negative changes.

Following the Clearnet and other acquisition, TELUS net debt as percentage of total capital increased to 58.6 per cent by 2002.TELUS stock prices fell from $16.67 to $10.40 in 2002 April to July. As a matter of fact the dividend re investment program was dropped from 47 per cent to 10 per cent. The employee stock purchase program had also been declined at this juncture. This can be termed as one of the worst negative change happened. Meanwhile increasing their accounts receivable securitizing program from $150 million to $500 million has given them more liquidity. $350 million which was the net sale proceeds were used to pay debts and that showed in a way even if all their plan of reducing expenses work out the company would have the same debt as it had in the previous year. But continuing in the same operation for another three years would get the company into a position where it could bring the debts down.

Inn 2002, before the Teleglobe bankruptcy the Moody’s have informed TELUS that there would not be a one notch downgraded rating. And even in the beginning of the month of June the Moody’s have stated that the TELUS’ rating out look was stable, but not even a fortnight passed when the Moody’s placed TELUS’ rating under review for a possible down grade. IN fact Moody’s cited several concerns in their rating such as TELUS credit being non-investment grade with a suggestion of another down grade in the future was distinctly possible.

Considering the fact that after Moody’s announcement was made the TELUS prices experienced one of the most dramatic declines in pricing for an investment grade credit. Moreover three of the other credit rating companies have rated them, recently, well in to the safer zone for the investors. One must, therefore, think that Moody’s can guess more than analyze. It gives a slight impression that Moody’s rating was inappropriate and biased.

The specific actions to be taken.

It’s the time when Mc Farlane should stick to the basics. The goal he has before him is to keep up with the objectives of TELUS financing plan.

He needs to install confidence in the board and in the large number of staff about the fact that while the current levels missed the liquidity target by almost a $100 million, the predicted comfortable surplus over the target by 2003 is solid. Which would help the employee stock purchasing program to pick up. And that statistics would have a telling effect on the public investors. With the completion of the increased accounts receivable securitizing program the cash flow was definite to turn positive by 2003. He could stick to the plan and bring it fruitful.

He would be needed to go all out make the plan he had with his treasuries a week earlier. Because that would bring immediate change and confidence. He could always make the executives and the board convinced about the future prospects and use a portion of the liquidity in purchasing. At the same time sell the share with a small discount to the employees.

What is the purpose of the modern corporation and how can society ensure that corporations comply with at least minimal standards of acceptable behaviour? In today’s society, associations like corporations are important. A corporation is recognised by civil laws and regarded in all ordinary transactions as an individual. According to Evans ; Freeman, (1995, p. 199), corporations ‘have ceased to be merely legal devices through which the private business transactions of individuals may be carried on.

‘ There are indeed many purposes that the corporation are to achieve. They are seen essentially as a vehicle for maximising the wealth of their shareholders, to maintain goodwill with their stakeholders and most of all, to maximise their profits. The focuses for this essay are on the main purposes of the modern corporation discussed above. However, there is a view ‘gaining widespread acceptance that corporate officials and labour leaders have a social responsibility that goes beyond serving the interest of their stockholders or member’ (Friedman, 1962, p. 27).

This essay will also discuss about the types of problems within the modern corporations which leads to the society such as government, customers, pressure groups and communities to convince the corporate officials to accept certain behaviours towards the society, in which to enable the corporations to have at least minimal standards of acceptable behaviours. One purpose of the corporation is to take responsibility for stakeholders’ benefits.

Stakeholders are defined as ‘constituency in the environment that is affected by an organisation’s decisions and policies and that and influence the organisations’ (Robbins, et. al, p. 92). Stakeholders are simply groups that have a claim on the firm. Such groups include employees, suppliers, local community and media. The corporation main purpose is to manage ‘for the benefit of its stakeholders: its customers, suppliers, owners, employees, and local communities’ (Evans ; Freeman, 1995, p. 205). The reason why managers bother to care about managing stakeholder relationships is because Robbins et. al (2003, p. 93) state stakeholders lead to other corporation outcomes, ‘such as improved predictability of environmental changes, more successful innovations, greater degrees of trust among stakeholders, and greater organisational flexibility to reduce the impact of change. ‘

Another purpose for the modern corporations is profit maximisation. Friedman, who focused on the narrow view of the corporate social responsibility, believes that profit maximisation is a must ‘so long as it stays within the rules of the game, which is to say engages in open and free competition without deception or fraud’ (Friedman, 1962, p.28).

This is one of the problems in dealing with social responsibility as firms only aim to maximise their profits. ‘in the present climate of opinion, with its widespread aversion to capitalism, profits, the soulless corporation and so on, this is one way for a corporation to generate goodwill as a by product of expenditures that are entirely justified in its own self interest’ (Friedman, 1962, p. 32).

Corporations’ leaders have reckoned with a profit motive, with ‘a desire to evade whatever response of controls is imposed’ (Arrow, 1972, p. 39). Another fact is that the distribution of profit maximisation is very unequal. According to Arrow, (1972, p. 40), stresses that ‘the competitive maximising economy is indeed efficient – this shows up in high average incomes – but the high average is accompanied by widespread poverty on the one hand and vast riches.

‘ Therefore, the firm will have the ‘tendency to pollute more than is desirable; that is, the benefit to it or to its customers form the expanded activity is really not as great, or may be as great, as the cost it is imposing upon the neighbourhood’ (Arrow, 1972, p. 40). The third purpose of the modern corporation is the enhancement of capital growth and increase the wealth for their shareholders. Under managerial capitalism, ‘management vigorously pursues the interests of shareholders or stockholders’ (Evans & Freeman, 1995, p. 200).

This occurs when the corporation is making a profit; when profit is made, there will be dividend payouts to the shareholders resulting in increase in wealth. The problem with this type of purpose is that shareholders, given the difficulties associated with trying to bridle directors through shareholder voting and/or derivative suits, rational shareholders would never give up control over trillions of dollars of financial capital, and trillions more in specific human capital and implicit contract claims, to nakedly selfish boards (Evans & Freeman, 1995, p.205).

However, there are problems arising from the modern corporation. In recent years, a corporation affects groups in the stakeholders by selling its products, which leads to competition in the market, in turn paying wages to employees, sets the product price to customers and establish good economic relations. However, corporation is also a contributor to pollution.

For example, in the automobile corporation, according to Arrow (1972, p.39), the automobile firm affects other through determining the quality of its car products, in respect to its safety purposes, the pollution it produces are mainly from the exhaust, pumping out carbon monoxide, a very dangerous gas. Other problems such as employees in the third world countries, in which corporations are located, are being mistreated. Many employees are ‘still exposed to hazards that kill and maim them; even young children are working’ (Pincus, 1998, p. 765).

Many are paid relatively low wage per hour every day. For example, in Honduras, the sweatshops that made a line of clothing to supply to Wal-Mart, the workers, including underage and pregnant women worked for more than 20-hour days at only $0. 31 per hour (Pincus, 1998, p. 767). What makes matters worst is that even developed countries such as the USA, for example, the ‘garment operations situated in California had been spot-checked that 93% had health and safety violations’ (Pincus 1998, p. 766).

Tesco could be run as a private limited company because funding will be available as there would be more than 2 shareholders who are willing to invest their money into the business. The board of directors must be committed to the business because if the business is doing well, they are most likely to be doing well. This will stop other investors placing takeovers bids in order for them to own the business which in this case is Tesco, without having to have to pay the market value of the business but instead paying much less as the shares would have most likely dropped because of the loss the business may be making. The take over bid may increase its value as there most certainly will be more than one bidder and so they will bid until eventually everyone has backed down apart from one bidder.

As a private limited company, the business would be isolated from fluctuations in share prices on the Stock Exchange in response to changes in the economy. But a private limited company may not be able to raise as much share capital as if it was a PLC Ownership of Chester Zoo I will now explain Chester Zoos history. In 1931 George Mottershead founded Chester Zoo. He wanted to build a zoo of his own because when he was a child, he visited a zoo called Belle Vue Zoo in Manchester; reports suggest that he was very upset seeing large animals in small cages, so he fuelled his developing interest in creating a zoo of his own which is now called Chester Zoo.

3 years later his venture became the North of England Zoological Society, and with considerable skill and enthusiasm, he kept the Zoo going through the Second World War. Rapid expansion followed after the war. ‘Always Building’ was a slogan of the time. He received the OBE, an honorary degree of MSc, and served a term as President of the International Union of Zoo Directors. During 1937-1960 Chester Zoo magazines were available for sale at �4.99 each in the Zoo library at Cedar House. Later in 1978 George Mottershead ages 78 died having realised his dream of a ‘zoo without bars’. Chester Zoo at the present is the most wildlife attraction in Britain counting more than 1.3 million visitors in 2007. In the same year Forbes described it as one of the best fifteen zoos in the world

What Ownership does Chester Zoo have? Chester Zoo is a registered Charity Limited by Guaranteed. Charity Limited by Guarantee means type of organisation normally formed for nonprofit purposes, in which each member pf the company agrees to be liable for a specific sum in the event of Liquidation. It is often believed that it cannot distribute its profits to its members but this is not actually true. A company limited by guarantee that distributes its profits to members would not be eligible for charitable status.

The zoo is owned by the North of England Zoological Society. This group would have limited liability i.e. the people involved would not lose any money (personal possessions) if the Zoo went out of business. These people would have limited liability. Chester Zoo’s mission statement is “The role of the zoo is to support and promote conservation by breeding threatened species, by excellent animal welfare, high quality public service, recreation, education and science” This mission statement supports Chester Zoo being a Charity Limited by Guaranteed.

Chester Zoo is a nonprofit organisation because its main aim is to teach people about conservation at the zoo (the protection of plants and animals that are in danger in their natural environment “the wild”). Another aim at Chester Zoo is to educate people, by making them aware of the role of the Zoo and informing people about what they can do to help. As well as education another aim at Chester Zoo is scientific investigation, this is finding cures for diseases affecting animals and the causes of environmental problems. Finally Chester Zoos other aim is enlightened leisure, this is to provide tourists with attractions that offers an educational worthwhile day out.

Why does it have this from of ownership? Chester Zoo is a charity because the money made can be re – invested back into the zoo and does not have to go to shareholders. The money re-invested back into the zoo can be used to pay the staff at the zoo and food/shelter etc for the animals. Also the money can be used for vital medical equipments for ill animals. This is why being a charity is better than being an Ltd or PLC because you don’t have to pay the money to anyone.

Another reason why Chester Zoo has this form of ownership is that profit at Chester Zoo is not the main concern, the zoos main concern in conservation such as breeding program for endangered animals because they care about the welfare of animals. If Chester Zoo was a business they would need to make a sustainable profit, if they didn’t, many of their shareholders will sell their shares off, leaving the zoo with huge financial problem let alone the wages for staff at the zoo and food/medication for the animals.

Also Chester Zoo being a Charity means that they don’t have to pay tax to the government such as income tax (on gifts given), corporation tax, stamp duty, VAT, rates, capital gains tax and inheritance tax plus increased public support as the organisation is more likely to be viewed as legitimate and worthy. Furthermore Chester Zoo being a charity can sign up to the gift aid plan. Members of the public might visit Chester Zoo as a charity because they want to support it. In the UK today there are probably over 500,000 voluntary organizations – fewer than 200,000 of these are registered charities.

Charities can be organized in a number of different ways – they can be an unincorporated association, a trust or a company limited by guarantee. Each of these has a different governance structure – for example, a charity that is formed as a registered company will be governed by a board of directors, a charity that is set up as a trust will be governed by a board of trustees. Every charity has to have a governing document that sets out the charity’s objects and how it is to be administered. To register as a charity, an organization must have purposes that are defined under law as charitable. These include the relief of financial hardship, the advancement of education, the advancement of religion and other purposes that benefit the community.

An associate companies of Sumitomo Mitsui Finance Group (one of the global corporate client of KPMG) Provide risk coverage against the credit provided by Goldman Sachs to its corporate clients. Project Funding Corporation: SPV administered by Deutsche Bank Cayman Ltd and CSFB New York Branch as the Investment Advisor. Crystal Fund Ltd: Closed ended fund investing in Collateral Loans Obligations (CLO)/Collateral Debts Obligations (CDO) administered by Canadian Imperial Bank of Commerce (Cayman) Ltd.

Thames SPC: SPV, administered by Dresdner Kleinwort, comprised of 28 segregated portfolios created to facilitate the issuance of a series of capital protected notes by a related party to third party investors. Kevian Capital Fund, SPC: Fund comprising of two segregated portfolios (for different shareholder’s group) dealing with the investments in futures, forwards and government treasury notes. Cable and Wireless Ltd: Cala Management Services:

Company provided the management services to the largest cellular phone company in the whole Caribbean region. STB Omega Investment Ltd: One of the subsidiaries of The Sumitomo Trust and Banking Co. , Ltd (one of the global corporate client of KPMG) mainly dealt with the investment in CDO/CLOs administered by Canadian Imperial Bank of Commerce (Cayman) Ltd. Clients: Client’s portfolio includes Citigroup, The Bank of New York Mellon, HSBC, Bank Julius Baer, Kaufman Rossin & Co. , Sumitomo Mitsui Banking Corporation, UBS Cayman and Canadian Imperial Bank of Commerce. Tahir Manzoor SULTANATE OF OMAN – MUSCAT Four months worked on secondment from KPMG Pakistan to KPMG Oman,Dec 2004 – April 2005 Auditor

Created and implemented audit strategy including staff requirements, budgets and timing; maintained full responsibility for preparation and supervision of all facets of planning. Supervised and reviewed audit staff. Oversaw financial evaluations and credit reviews. Clients: Audit of Salalah Mills Company SAOG, Raysut Cement Company SAOG, Salalah Hilton Company SAOG, Dhofar Poultry Company SAOG, Salalah Medical Supplies Co. LLC, Oman Gulf Construction Co. , LLC, International Golden Furniture Co. LLC, Oman Drilling Mud Products Co. , LLC, Insurance Management Services Co. LLC and Snowhite LLC.

PAKISTAN – KARACHI, Affiliate with TASSER HADI KHAILD & CO. (A Member firm of KPMG) A reputed international firm of Public Accountants in PAKISTAN July 2001 – Sep 2005 Promoted to Assistant Manager, Audit & Allied Services Department Oversaw statutory audits, special audits and related accounting matters. Clients: National Bank of Pakistan, Habib Bank Limited, Deutsche Bank, Bank Al Falah Limited, Karachi Marriott Hotel, Hashwani Hotels Limited, Serena Hotel & Resorts, Merck Marker (Pvt) Limited, Parke Davis Pakistan Limited, R – Lintas (Pvt) Limited, Hyderabad Electric Supply Company Limited and Chappal Builders Construction Company.

Corporate governance is an era that has grown rapidly in the last few years. The global financial crisis, corporate scandals and collapses, and public concern over the apparent lack of effective boards and etc. have all contributed to explosion of interests in this area. Today every sector whether it is corporate, investment, public, voluntary or non-profit organizations are all placing more emphasis on good governance. Indeed corporate governance is now an integral part of everyday business life and is an ardent aspect of the corporate world.

Corporate governance has only relatively recently come to prominence in the business world. However, the theories underlying the development of corporate governance, and the areas it covers, date from much earlier and are drawn from a variety of disciplines including finance, economics, accounting, law, management, and organizational behavior. As corporations take center stage in almost every activity including investment, employment, and trade and production of goods and services, the manner in which they conduct their businesses creates issues of concern to the investors, creditors, employees and the society.

The various parties look towards formal (legal) and informal (non-legal) ways to protect their interests. The extent to which the formal or informal mechanism works to resolve the issues depends upon the corporate governance system of that particular jurisdiction. “Corporate governance varies from one jurisdiction to that of the other and even within a specific jurisdiction, overlapping features may be found”, (Gilson, 2005). The corporate governance system of a particular jurisdiction is shaped by various factors such as historical, legal, political and social factors of that particular jurisdiction.

Empirical studies particularly identify legal rules as critical factors in shaping a corporate governance system and this is perhaps because of the importance of legal mechanisms for investor’s protection. The studies by Rafael La Port et al. , (2000), are particularly important in this regard as they argue that countries such as U. S and U. K, which have strong legal rules for shareholder protection have market based corporate governance system. 1. 1 Defining Corporate Governance: There is no generally agreed-upon definition of corporate governance; however there have been several attempts to define the term: * The Organization of Economic Corporation and Development (OECD), (2004), defines corporate governance as “a set of relationships between a company’s management, its board of directors, its shareholders and the other stakeholders”. The essence of corporate governance is to address conflicts of interest commonly referred to as “agency costs” that arise out of the separation of ownership and control of companies. * According to the Cadbury committee, 1992, A Corporate governance is “the system by which companies are directed and controlled”.

It sets out the general principal rules that are to be followed by the companies in order to run there management with in the set norms and regulations. * “Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return”.

Mathiesen (2002).  “Corporate governance-which can be defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society”. Financial times (1997). Since corporate governance is the system by which business corporations are directed and controlled, its structure clearly specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholder and the other stakeholders and spells out the rules and procedures for making decisions on corporate affairs.

By doing this it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

Principles of corporate governance: Finance writer Leo Sun, refers some prominent key principles of corporate governance:

• a. Shareholder recognition as a key to maintain a company’s stock price. Good corporate governance seeks to make sure that all shareholders get a voice at general meetings and are allowed to participate.
• b. Stakeholder interests should also be recognized by corporate governance.

In particular, taking the time to address non-shareholder stakeholders can help your company establish a positive relationship with the community and the press. c. Board responsibilities must be clearly outlined to majority shareholders. All board members must be on the same page and share a similar vision for the future of the company.

• d. Ethical behaviour violations in favour of higher profits can cause massive civil and legal problems down the road. A code of conduct regarding ethical decisions should be established for all members of the board.
• e. Business transparency is the key to promoting shareholder trust. Financial records, earnings reports and forward guidance should all be clearly stated without exaggeration or “creative” accounting.

Importance of corporate governance: Governance is a term about which we hear a lot, especially in times of crisis. For corporations, when confronted with a hostile take – over bid, an ecological disaster, or the untimely death of the president, the governance role of the Board of Directors becomes a real and meaningful one.

When all is going well, too little seems to be done about crisis preventing and influence the overall direction of the corporation. There is clearly a need in many corporations for a new debate on corporate governance to address such issues as:

• What are the responsibilities of the firm to various stakeholders?
• Can competitive advantages be gained by building relationships with stakeholders?
• What standards of performance and behaviour are expected of the organization?
• What incentives are needed to encourage more socially and environmentally responsible results?
• What information and measurements are needed to set goals and to evaluate corporate social and environmental performance?

Monks and Minow, underscored the importance of corporate governance today stating that “the importance of corporate governance became dramatically clear in 2002 as a series of corporate meltdowns, frauds, and other catastrophes led to the destruction of billions of dollars of shareholder wealth, the loss of thousands of jobs, the criminal investigation of dozens of executives and record breaking bankruptcy filings”.

However corporate governance is important as it plays a vital role on following aspects:

• Economic Growth and Globalization
• Investors’ Confidence
• Enhance Company Performance
• Sustainable Growth

OBJECTIVE:

The objective of the present study is to discuss the meaning and purpose of director’s independence in corporate governance and its evolution in India. The focus of the study is on the liability of Independent Directors of a company and how it is followed or complied in Indian corporate system.

As all these issues have come into limelight after the SATYAM fraud was revealed, this study discusses the liability of Independent Directors with regards to the case study of SATYAM COMPUTERS in India.

Directors and Corporate

Governance in India: According to Mallin, (2012) India has a range of business forms, including public limited companies, which are listed on the stock exchange, domestic private companies and foreign companies. On the other hand India is following the global trend in reforming its corporate governance system.

However, as a former colony of Britain, India has a UK-style legal system and since the second half of the 19th century, Indian industry has generally followed an English common law framework of joint stock limited liability as referred by Goswami, (2000). As earlier mentioned, corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders and also the structure through which objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

The focus of corporate governance in India is to impose disclosures and compliance, upgrade corporate governance practices and facilitate the integration of Indian business with their global counterparts. After much debate and controversy, in 2006 Securities and Exchange Board of India (SEBI) made it mandatory for publicly listed companies to follow the provisions of clause 49 of the listing agreement. (www. sebi. gov. in) A company is separate legal entity distinct from its shareholders. The major constituents of a company are its members, who are the ultimate owners and its directors.

It is an important feature of the company form of business, that there is a gap between the ownership and control over the affairs of the company. In real sense the members are the owners of a company, but it is being managed by the directors who are elected representatives of its members, because it is absolutely necessary for it to have a human agency called as the Company’s board of directors. Directors are a group of people comprising the governing body of a corporation. The shareholders of a corporation hold an election to choose people who have been nominated to direct or manage the corporation as a board.

The functions of directors involve a fiduciary duty to the corporation.

 Need For Directors- Who is a Director?

A company being an artificial person cannot act by itself. It has neither a mind nor a body of its own. It must act through some human agency. The persons by whom the business of the company is carried on are termed as directors. The institution of the company is composed of two organs, the general body of shareholders and the board of directors. The board is the managerial body to whom is entrusted the whole management of the company.

Directors owe a duty to the members to exercise care, skill and diligence in discharge of their functions. (Garg, Gupta and Chawla, 2012) 2. 2 Statutory definition of Director:

According to section 2(13) of the Companies Act, 1956, “director” includes any person occupying the position of director by whatever name called.

 Clause 49 of listing agreement by SEBI The clause 49 of the listing agreement by SEBI deals with corporate governance and lays down various processes and disclosures to be followed by all the companies.

It tells about the board composition, compensations, committees and management. As per Clause 49 of the Listing Agreements an independent director shall mean non-executive director of the company who:

• a) apart from receiving directors remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies;
• b) is not related to promoters or management at the board level or at one level below the board;
• c) has not been an executive of the company in the immediately preceding three financial years;
• d) is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity;
• e) is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also; and
• f) is not a substantial shareholder of the company, i. e. owning two percent or more of the block of voting shares. But despite of these rules whether the director are independent or not is a debatable question and the present work will analyse it in regards with Satyam Computers which is regarded as the Indian Enron.

Role Of Independent Director: Directors play a vital role in the company and their role can be evaluated by discussing the following points as stated by Clarke, (2007):

Role in Corporate Governance: A corporation is the congregation of various stakeholders such as customers, employees, investors, shareholders etc. A corporation should be fair and transparent to its stakeholders in all transactions. This has become imperative in today’s globalized business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community.

Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. Corporate governance is about the ethical conduct in business. In this regard, the managers make decisions based on a set of principles influenced by the values, context and culture of the organization. In India, the companies fill the Boards with the representatives of the promoters. These Directors may derive personal benefits rather than work for the benefit of the Company. This has posed great difficulties in the functioning of the company and is in contradiction of the principles of corporate governance.

Independence of the Board is critical to ensuring that the Board fulfils its oversight role objectively and holds the management accountable to the shareholders. Therefore, ensuring some independent members on the Board can uphold corporate governance principles. Protection of the Minority shareholder: The shareholders, especially the minority shareholders prefer coming to independent directors who provide transparency in respect of the disclosures in the working of the company as well as maintain a balance towards resolving conflict areas.

In evaluating the board’s or management decisions in respect of employees, creditors and other suppliers of major service providers, independent directors have a significant role in protecting the stakeholders interests. Risk Management and Review: It means identification, analysis and economic control of all such risks that may threaten assets, resources and earning capacity of the company. The risk may be financial, strategic or any other risks. The role of the Independent Director is to ensure that all the investment, funds, business transaction etc.

are heading in a right way and critically scrutinize the decision making process. Role in relation to the board: As members of Board, their role is similar to any other director; Independent Directors primarily provide inputs to all key-decisions, such as strategies, performance evaluation and risk evaluation, affecting the company. Significant contribution is expected when matters relating to the committee on which they are members are being discussed.

They should ensure that the Board addresses areas of concern on the running of the company and assist them in resolving the issues harmoniously. While the legal duties and objectives are the same as Executive Directors, the time devoted by independent Non-Executive Directors to the company’s affairs is significantly less and therefore the degree of care, skill and diligence is lower than that expected from Executive Directors, and this can be seen as a disadvantage by some. However, certain standard of care has to still be ensured.

As members of the Board, an Independent Director’s should, not only comply with the code of conduct but also establish, implement, monitor its adherence by other senior management and set an example for others. Improving Internal Control: The consummate internal control is the imperative requirement of the company. It activates the overall management policies and keeps them under the feasible ranges. The process of the internal control commences right from the birth of new policies by the Board of directors and continues to the bottom the organizational structure.

It includes development and operation of the management policies, administrative regulations, manuals, directives and decision, internal auditing etc. The responsibility of the independent directors is to act as supervisory body and monitor the internal control system. They must identify the imperfection in the internal control system and present them before the board to find suitable solutions to obviate them.

Statutory Compliances:

To maintain high standards in the market and excellent reputation in the public or investors, stricter adherence to the statutory laws is a pre-requisite for the company.

The postulates of good corporate governance require the Companies to enforce the multiple statutes and rules and regulations given there under. This facilitates the ultimate objective of protection of investors’ interest. The above stated roles though clarify the importance of director’s independence, but despite this, the directors are never regarded fully independent. Therefore whether there are pitfalls in the present laws or in the corporate management will be seen in the company stated below.

Current scenario in India:

In 2009, the pendulum swung both ways for India Inc.

There was much good news- corporate India came out of the global financial crisis smelling like a rose, with the Sensex surpassing its pre-crisis heights and India’s economic growth rates far exceeding most estimates (Satapathy ; Bharadwaj, 2009). However, 2009 was also a watershed year in the “bad news” category, with revelations of the biggest scandal in corporate India’s history at Satyam Computer Services and the travails of Nimesh Kampani relating to his service as an independent director at Nagarjuna Finance dominating the headlines and eroding confidence in corporate India both domestically and overseas (Banerji, 2009).

These events attracted significant public attention to an invited the scrutiny of India’s independent directors, and many of these independent directors took notice: at least 620 independent directors resigned from the boards of Indian companies in 2009- a figure that is, to our knowledge, by far without precedent globally. This exodus of independent directors highlighted a deep discomfort within corporate India with the very institution of independent directors in the context of companies controlled, directly or indirectly, by corporate founders, or promoters.

In spite of number of provisions provided in Indian laws to preserve the independence of independent directors, in reality, majority of the companies look at it only from the compliance point of view and have made use of number of loop holes to suit it to their needs. In some of the listed companies independent directors are related to each other. Some listed companies do not appoint new independent directors after the resignation of old independent directors on the plea that they are unable to find a suitable person.

Some listed companies circumvent the provisions of appointment of independent directors under the pretext that there are no entry and exit norms of independent Directors in terms of age, qualification etc. Some listed companies treat nominees of financial institutions and government as independent Directors. Currently a single independent director can be simultaneously found to working for more than a dozen companies.

Each company generally conducts close to 10 board meetings an year, 2- 4 audit committee meetings and one remuneration committee meeting. Some companies follow a policy of swapping wherein a director from company A works as an independent director in company B and vice versa. Press reports indicate that in a number of companies independent directors did not attend a single meeting during the year. Politicians are also known to interfere in the working of the PSU companies and hence completely tossing around the idea of independent directors.

Even the appointment of directors in PSU’s involves hectic lobbying. Hence the concept of independent directors being relatively new in India combined with the large number of listed companies (with numbers increasing each subsequent year), there is also a shortage of credible independent directors. Annual reports of many companies show that Independent Directors only fulfil regulatory requirements but in practice act as rubber-stamp of promoters.

Press reports indicate that in a number of companies Independent Directors did not attend a single meeting during the year. In some companies same Independent Directors continued for more than 15 years. This clearly leads to Corporate Failure in India which leads the work to the case study of Satyam Computers Scam.

A case Study:

Satyam Computer Services Satyam Computer Services Ltd. was founded in 1987 in Hyderabad, India, by B. Ramalinga Raju.

The company is a part of the Mahindra Group which is one of the top 10 industrial firms based in India. The company offers consulting and information technology (IT) services pning various sectors, and is listed on the New York Stock Exchange, the National Stock Exchange (India) and Bombay Stock Exchange (India). In June 2009, the company unveiled its new brand identity “Mahindra Satyam” subsequent to its takeover by the Mahindra Group’s IT arm, Tech Mahindra on April 13, 2009 (http://www. mahindrasatyam. com/).

Real Resources NL contemplates on issuing preference shares to a bank in exchange of a bank finance. The issue put forth is whether or not Real Resources NL would be in the best position to issue preference or ordinary shares for financing purposes. In order to understand the issue, it is best to define the types of shares that a corporation may issue to its shareholders and the liability of a corporation as regards these types of shares. RELEVANT LAWS Shares may be classified as ordinary, preference, cumulative, and redeemable.

Shares are considered as ordinary when they have no special rights or restrictions, the potential to get the highest financial gains or the highest risk, and they are the last to be paid in case the company is dissolved. Shares are considered Preference shares when there exists a preferential right to annual dividends during distribution, there is a fix value to dividend sharing, a right to dividends ahead of all other shareholders, and a right to be paid the par or nominal value of the share ahead of others in case of dissolution of the corporation.

Shares are considered cumulative when there exists a right to carry over of dividend shares to the next payment period which must be paid despite the status of the business. Lastly, shares are considered redeemable when there exists a buy-back agreement at a future date. Shares may be further categorized by corporations depending on the definition, limits, and restrictions that may be stipulated in the Articles of Incorporation. All rights and liabilities of particular types of shares shall be defined and limited to such stipulation .

Real Resources NL needs capital to address their needs. The company has to inquire into and fully understand the nature of the bank and the kind of security that is acceptable to the bank in order for the latter to finance the company’s needs. Banks are governed by banking laws and their Articles of Incorporation. There are limits as to what banks may be allowed to transact when it comes to shares of stocks in corporations. There are also limits to the authorities granted to its officers to make transactions binding.

Thus, to ensure that all transactions with the bank are within the limits of authorities, the Board of Directors of Real Resources NL should know the provisions in the banking laws and Articles of Incorporation. Corporations are granted the power and the facility by the the Stock Exchange to raise capital for expansion through the selling of shares to the investing public . In doing so, corporations may issue shares of stock in the manner, amount, and volume as may be provided under its by-laws. APPLICATON OF LAWS

As provided by law and under the articles of incorporation, any corporation like Real Resources NL is authorized to issue shares of stock for sale to the public. By law, Real Resources is authorized to issue out its maximum authorized capital stocks in order to pursue business processes and transactions. The success of this sale of shares would greatly depend upon the attractiveness and acceptability of the corporation. The stability and profitability would be the next factors that would be considered.

Real Resources NL, as a legitimate corporation, is also empowered to determine which sector of the public it would issue out its shares of stock. The laws grant any incorporation the right to choose its partner-shareholders in order to ensure that the business grows. The preferred public would be given the preferential right to purchase the shares of stocks. When Real Resources Inc. goes public, its share would already be subject to the control and management of Stock Exchanges. The issuance of preference shares is more prescribed to private or pre-public companies.

Public trading of preference shares may be regulated by the rules of stock exchange and other governmental regulations . In the case of Real Resources NL, the determination of the limits and restriction of the preference shares which the company proposes to issue to the bank must first be defined. This is to ensure that the preference share issued to the bank will not unduly disadvantage other shareholders in case of dissolution of the company. Every bank has a regulator who ensures that the bank’s standing before any partner company is not compromised.

Thus, the regulator would usually set the parameters of preference shares to be issued in favor of the bank by ensuring that a return of investment will be realized by the bank from the capital investment it granted to the company. The regulator’s responsibility is to maximize the bank’s gain as may be realized from the preferred shares. At the same time, the regulator would also look into the potential of gaining control over the company in case the latter loses its financial strength in favor of the bank.

Thus, from the regulator’s point of view, the preference shares should give the bank an edge as to fixed returns and potential control . As a legitimate corporation incorporated under the legal and governmental rules, Real Resources NL is authorized to issue shares of stock up to the maximum of its authorized capital stock. It has the power to classify its shares of stocks depending on the company’s strategic plans to grow the business of the company.

On the part of Real Resources NL, the bank must be considered as an investment partner with the rights commensurate to the capital investment it granted to the company. Thus, it is important that the fixed returns of the preference share must be carefully fixed returns is not conditioned upon the status of the company. Rather, whether the company loses its business or fails in the realization of some profit, the established fixed returns attached to the preference share shall be duly implement without need of rationale and justification .

Thus, the role of Real Resources NL is to ascertain that % fixed return which may be attached to the preference share and by imposing that the preference share carries no voting rights whatsoever. Another factor to be considered is the preference that the bank will enjoy when it holds preference shares during liquidation and dissolution of the company. The bank’s equity over the company’s share should not serve as a denial of shareholders’ equity. All shareholders must have their won equities served thereby in case of dissolution.

It is therefore important that the rights of small shareholders are protected as against the rights of the bank in case of dissolution. To ensure that their rights are protected, preference shares should be customized by defining its limits and identifying its rights. There is no guarantee as to the success of any undertaking and this holds true for investments in corporations . The Board of Directors should proactively look beyond the existence of the company and develop its strength in case of losses.

While there could be no absolute control and certainty on profitability, the Board of Directors may already establish the parameters upon which the bank may put any liability, exercise any right control and assert any right against the company. With all the foregoing, the Board of Directors of Real Resource NL may issue preference shares to the bank in exchange for the capital investment that may be used for the company’s needs. Provided that limits, conditions, and restrictions are clearly defined, this strategy may well be utilized by Real Resources NL. CONCLUSION

Corporations are governed by the Articles of Incorporation and the governmental laws and regulations. This set of laws mandate the corporation’s existence as it develops in the pursuance of its legitimate business. The Officers or the Board of Directors are clothed with authority to exercise decision making and control powers within the ambits of the Articles of Incorporation. Thus, in whatever undertaking, whether in the raising of capital funds or investments for the purpose of addressing the needs of the corporation, the authority of the Board of Directors is always exercised within the limits of the powers vested upon them.

In the interest of the Board of Directors of Real Resources NL to issue preference shares to the bank in exchange of capital investment, the power of the Board of Directors to effectively enter into such undertaking shall be looked upon on the basis of what is provided under the Articles of Incorporation. This would be the basis of the Board’s sound decision of issuing preference shares to the bank provided limits and restrictions are set in order to protect the interests of other shareholders. REFERENCES Gilson, Ronald J. ; Black, Bernard S. (1998).

“Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets”. Journal of Financial Economics 47: 243–277. doi:10. 2139/ssrn. 46909 FSA Handbook, PRU 2. 2 Capital resources Accessed July 31, 2006 Gilson, Ronald J. ; Black, Bernard S. (1998). “Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets”. Journal of Financial Economics 47: 243–277. doi:10. 2139/ssrn. 46909 http://info. nbfinancial. com/fbn/cda/theme/0,,divId-2_langId-1_navCode-10092_navCodeExTh-0,00. htm http://info. nbfinancial. com/fbn/cda/theme/0,,divId-2_langId-1_navCode-10092_navCodeExTh-0,00. htm

The rise of corporations, such as Carnegie Steel, J. P. Morgan, and Standard In the late sass’s, was able to dramatically shape the country politically, socially, and economically and even continues to do so today through new modern finance and monopolies. Industrial growth was mainly fueled by a surplus in resources, immigration and therefore cheap labor, and major technological advances that expanded the capabilities of various industries. As technological advances transformed production and distribution, a wave of inventions, including the typewriter, light bulb, and automobile led into new

Industries. Through this boom In business, leaders learned how to operate many different and the modern corporation was “born” into one of the most important roles in the future of business. These corporations seemed “new” for many people in the country, but corporations actually date back to the 16th and 17th centuries, where they were used by royalty governments to organize exploration and possible colonization. Many businessmen politicians had been suspicious of the corporation from the time it first emerged in the late 16th century.

Unlike the partnership form of business, which dealt with a small mount of people on a personal level, the corporation separated ownership from management. In Adam Smith’s The Wealth of Nations, he warns that because managers could not be trusted to steward “other people’s money”, “negligence and profusion” would eventually result when businesses organized as corporations. In 1811, New York became the first state that passed legislation concerning protocol and procedure for becoming a corporation, and other states eventually adapted this as well.

Corporations were well suited to meet the demands of the Industrial Revolution, which generated ant increase in business opportunities which, in hand, required massive amounts money but “over the last 150 years the corporation has risen from relative obscurity to “The genius of the corporation as a business form, and the reason for its remarkable rise over the last three centuries, was-and is-its capacity to combine the capital, and thus the economic power, of unlimited numbers of people” (Bake 9). As corporations become more powerful and fuel development of large-scale industry, they affect politics.

The men dollied by some and vilified by other, America’s 19th century Robber Barons were the true creators of the modern corporate era. The railroad was first major monopoly in the United States. Since these railroads were massive undertakings, they required millions of dollars in capital investment. This was more than could be provided by relatively small group of wealthy men who invested in corporations at the turn of the century and the majority of the money was raised through the sales stocks and bonds.

With greed and corruption heavily present throughout the construction of the railroads, beginning in the asses, the corporation underwent a major ramification. The states of New Jersey and Delaware sought to attract valuable incorporation business to their Jurisdictions by Jettisoning unpopular restrictions from their corporate laws. In addition, they also repealed the rules that required businesses to incorporate only for defined purposes, to exist only for limited durations, and to only operate in certain they abolished the rule that one company could not own stock in another.

Soon the rest of the country, not wanting to lose out in the competition for the incorporation business, soon allowed their examples with revisions to their own laws. With flexible freedoms and powers now available, there was a large amount of incorporation by businesses. However, with all the constraints on mergers and acquisitions gone, it was only a matter of time before companies bought each other out. “1,800 corporations were consolidated into 157 between 1898 and 1904. In less than a decade the U. S. Economy had been from one in which individually owned enterprises competed freely among themselves into one dominated by a relatively few huge corporations, each owned by many shareholders” (Bake 14). The era of corporate capitalism had begun with all those consolidations and mergers. With the economy dominated by a few huge corporations, we find ourselves looking at the development of monopolies, development the states started by limiting set laws. With the growing capitalism pressuring politicians, a bizarre law was passed by the Supreme Court in 1886. The courts had fully transformed the corporation into a “person”, complete with its own identity, separate from the actual people who were acquire assets, employ workers, pay taxes, and go to court. The logic of this law conceived if reparations were considered free individuals, or “persons”, corporations should be protected by the Fourteenth Amendment’s right to due process of law and equal protection of the laws, rights originally added to the constitution to protect freed slaves” (Hobbies 208).

Trusts were becoming a problem after several years of abuse by major corporations. By the end of the 19th century, trusts used to crush competition and create monopolies throughout different industries had gotten to a point where the public demanded that there be something done. Congress ended up passing the Sherman Antitrust Act in 1890. This Act has two main provisions which apply to most of the corporations of the time.

Every contract or agreement, in the form of a trust or not, or conspiracy to restraint trade in commerce is illegal and second, it would be illegal for anyone to monopolize, try to monopolize, or conspire to monopolize commerce. The Sherman Act was Just the first of a series of laws aimed at controlling attempts by business firms to conspire and establish monopoly power in industry and commerce. Other acts followed when it became apparent that the Sherman Act had loopholes. Teddy Roosevelt was known as the “trust buster” because of his anti-monopoly views.

Many large corporations had complete control of an entire industry and Roosevelt went in to these companies and helped to stop this type of monopoly, even managing child protection laws, which were used to prevent children to work in factories and set up workman compensation, which is a payment that employers had to pay employees who get injured on the Job. After the Great Depression occurred sometime around 1929 until the early asses, Roosevelt stepped in and called for Congress to help him pass his “New Deal”.

The “New Deal” was a package of regulatory reforms designed to restore economic health by, among other things, crushing the powers and freedoms of corporations” (Bake 20). On March 9 Congress passed the Emergency Banking Act, which allowed the federal banks to be inspected. They also passed the Glass-Steal Act, which had stringent rules banks and provided insurance for depositors through the newly created Federal Deposit Insurance Corporation (FIDE). Two more acts in 1933 and 1934, mandated specific regulations for the securities market, enforced by the new Securities and Exchange

Commission (SEC). Several bills provided mortgage relief for farmers and homeowners and offered loans for home purchasers through. Also, the National Labor Relations Act of 1935 gave federal protection in the bargaining process for workers and established a set of fair employment standards. The National Labor Relations Act guaranteed workers 1938, the last major program launched by Roosevelt specified maximum hours and minimum wages for most categories of workers.

A monopoly is considered an economic situation in which only a single seller or reducer supplies a commodity or a service. Economic monopolies have existed throughout most of history and in modern times we still deal with their continued threat. We usually encounter monopolies when giant business firms began to emerge and dominate the economy. Usually more than one firm in the same industry grows and dominates the market resulting in oligopoly, in which the market is dominated by a few firms.

A modern example is Microsoft, which was founded in 1975 by Bill Gates and Paul Allen. In 1985, Microsoft released the Windows SO, an SO with the same features of DOS Just with a graphical user interface added for ease of use. Windows 2. 0, released in 1987, improved performance and offered a new visual appearance. In 1990 Microsoft released a more powerful version, Windows 3. 0. These versions, which came preinstall on most new personal computers, becoming the most widely used operating systems in the industry at the time.

In 1993 Apple lost a copyright-infringement lawsuit against Microsoft that claimed Windows illegally copied the design of the Macintosh’s operating system. In May 1998, the Justice Department and 20 states filed broad anti-trust suits Microsoft with engaging in “monopolistic” conduct. They wanted to force Microsoft to offer Windows without Internet Explorer or to include Navigator, a competing browser made by Netscape. In November 2001 Microsoft announced a settlement with the Justice Department and nine of the states.

Key provisions included requiring Microsoft to reveal technical information about the Windows operating system to competitors so that software applications could be compatible with Windows, while also enabling personal computer manufacturers to hide icons for activating Microsoft software applications. Imputer manufacturer could therefore remove access to Internet Explorer and enable another Internet browser to be displayed on the desktop. Corporations transformed the U. S. Economy through breakthroughs in technology as well as new business practices and strategies. The early Industrial Revolution not only changed manufacturing technically but also introduced a new organization of industry. These innovations followed from the new machinery but had advantages of their own. Together, these changes constitute its economic impact” (Stearns). Americans created giant enterprises. Businesses such as Standard Oil and Carnegie Steel brought together huge stocks of natural resources and unprecedented quantities of modern machinery to mass-produce goods for domestic and international markets.

In meeting these demands, American entrepreneurs pioneered the of modern business with its large-scale production and widespread markets, first by developing the railroad industry and then by creating industrial corporations. These railroads were massive undertakings, they required millions of dollars in capital investment. This was more than could be provided by relatively small group lately men who invested in corporations at the turn of the century and the majority the money was raised through the sales of stocks and bonds. “Everything the stock market is, and was, rooted in the basic idea of capitalism.

Without that idea, stocks bonds would never have come to be. Capitalism is an “economic system in which the means of production and distribution are privately or corporately owned and development is proportionate to the accumulation and reinvestment of profits gained in a free market” (Hobnail 48). In the steel industry, Carnegie developed a system known as vertical integration. Carnegie bought his own iron and coal mines because using independent companies cost too much and was inefficient. Through this method he was able to charge less than any of his competitors.

Unlike Andrew Carnegie, John D. Rockefeller integrated his oil business into horizontal. He followed one product through all its stages. Although, Carnegie inclined to be tough-fisted in business, he was not a monopolist and disliked monopolistic trusts. John D. Rockefeller came to dominate the oil industry. He created associated with his to turn over their common stock to nine trustees in exchange for trust artifices. However, in 1911, the Supreme Court found that unlawful monopoly power existed in company ordered him to dissolve it into smaller, competing companies.