Extant Literature Has Been Dedicated to the Essay

  • Length: 5 pages
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  • Subject: Business
  • Type: Essay
  • Paper: #64706683

Excerpt from Essay :

Extant literature has been dedicated to the concept of corporate ethics and governance. In regard to the Satyam scenario, Afsharipour (2010) discussed the expectations as well as challenges that face the Indian corporate governance landscape. The paper discussed corporate reforms that were put in place as a consequence of the Satyam fraud. The author recognizes the dire need for proper governance in the entire Indian corporate landscape as a consequence of India's ever expanding economy. Afsharipour (2010) indicated that there has been changes in the corporate governance conditions prior to and after the Satyam corporate scandal.The author indicates that even though the former Chairman of the company, Mr. Ramalinga Raju as well as his family jointly owned close to 8% of the company's shares, the company had as a majority, an independent Board of Directors that included various Indian luminaries and hence complying with the Clause 19 requirements of corporate governance.

The Board of Directors at Satyam included international dignitaries like Mangalam

Srinivasan (who advices the Kennedy School of Government, Harvard University), Vinod K. Dham (The founding owner of Pentium microprocessors) as well as Krishna G. Palepu, a Ross Graham Walker Professor of Business Administration among others. After the Satyam fraud several questions emerged on how such a massive financial fraud had taken place without any form of detection. Afsharipour (2010) mentioned that the minute of the board meeting that was held on the 16th of December, 2008 indicated that certain board members raised several questions regarding certain proposed transactions.

Some of the acquisitions were unanimously approved by the board without any for of dissent. The Satyam fraud case is an illustration of the role of Board of Directors in corporate governance as well as ethics. Afsharipour's (2010) work concluded that the closed nature of most Indian firms is what caused a general lack of disclosure as well as general lack of governance requirements.

Ponnu (2008) companies that implement that implement appropriate corporate governance system succeed in the provision of useful information to the stakeholders and shareholders in an effort of reducing the level of information asymmetry while helping the company to improve its operations as indicated in the work of Hsiang-tsai Chiang et al. (2005).

It therefore become important for one to really understand what corporate governance is. Mayer (1997) pointed out that corporate governance entails the bringing of interests of investors as well as managers in line as well as ensuring that a given firm operates for the investors' benefits. Corporate governance has a two-way relationship that runs between a corporation's internal governance as well as the general society's view of the level and scope of corporate accountability as pointed out by Deakin and Hughes (1997). Corporate governance should therefore be made to be inclusive of all of the structures, cultures, systems as well as processes that are needed for the successful operation of a given organization as indicated in the work of Keasey et al. (1997) where he used the concept of corporate governance as outlined in the Cadbury Committee Report of 1992.

Role of Board of Directors in corporate governance

Ponnu (2008,p.220) further investigated the role of board of governors in corporate governance. According to him, the board of directors plays an integral role in the running of a given organization. This is because it oversees the organization's top management besides being entrusted with the important responsibility of supervising as well as monitoring of the organization's resources. The board of directors also oversees the overall operation of the company. The board of directors can therefore be blames for some of the corporate governance failures witnessed in recent times such as the Satyam fraud.

The board of directors can therefore be collectively observed as a team of individuals who have fiduciary responsibilities of directing and leading a given organization but with the main objective of protecting the company's shareholders' interests as outlined in the work of Shamsul Nahar Abdullah (2004).

The boards of directors are indicated in the work of Ponnu (2008) to perform three critical roles in a given organization. The roles are' service roles, strategic roles as well as control roles as pointed out by Maasen (1999) and Zahra and Parce (1989).The roles are further elaborated to involve auditing, coaching, steering role as well as supervisory roles. Berle and Means (1932) indicated that the separation between the control mechanism and ownership has led to several potential cases of conflict of interest. This is pointed out by Jensen and Meckling (1976) to be as a result of the agency theory dynamics in which a management's self-interest is most likely to be involved in activities that decrease the value of the firm such as in the Satyam fraud in which the former Chairman, Mr. Ramalinga Raju channeled a large sum of the shareholders' money towards buying of personal and family land. Jensen and Meckling (1976) refers to the predicted reduction of a company's value due to the opportunistic behavior of the management as "agency cost."

Khanna and Matthew (2010) indicated that there is never a clear understanding of the expected role of the board members. In their work, they discovered that in the Indian context, the role of Independent directors is to act as strategic advisors. They therefore fail to regard themselves as the ' watchdogs'. They suggested that there is a general lack of time as well as resources among the directors to enable them to review the activities of the management.

The directors are also indicated to have a lot of concern over their knowledge as well as influence in certain aspects of plans that are presented by the promoter. The work of Khanna and Matthew (2010) therefore indicated that most directors regard their role as strategic advisors and therefore the imposition of rigorous monitoring duties on them is likely to be opposed and generally be perceived to be impractical. The board of directors therefore generally perceives the 'watchdog' role to be that of auditors. In the Satyam fraud case however, the auditors (PriceWaterhouse Coopers LLP) also failed to detect the fraud

The role of auditors in corporate governance

Extant literature has also been dedicated in the evaluation of the role of internal and external auditor in corporate governance. Anderson et al. (1993) pointed out that three main monitoring mechanism that exists in corporate governance are internal auditing, external auditing as well as directorship (Blue Ribbon Committee,1999).

Bushman and Smith (2001) indicated that accounting information which is publicly reported in order to portray a company's financial position as well as performance can be employed as an important tool of corporate governance. This is because it can be used in the drafting of managerial incentive plans, corporate monitoring by directors, debtors as well as outside shareholders.The usefulness of such information for corporate governance is however dependent on the quality as well as credibility of the information. External auditors can therefore be employed in order to ensure that there is an acceptable level of quality assurance for the information to be used effectively for corporate governance. The governance roles of the external auditors is pegged on ensuring that the quality of the accounting information meets the requirements that are outlined by the Securities Exchange Commission's (1999) for the appropriate pronouncement on the Audit Committee Disclosure.

The pronouncement indicates that managers of companies that have weal corporate governance are most likely to engage in opportunistic earning activities like the manipulation of the company's earnings in order for the profit targets to be realized (Healy,1985). Public Oversight Board (1993) also indicated that internal audit is an integral element of corporate governance.


Afsharipour, A. (2010): The Promise and Challenges of India's Corporate Governance Reforms,

UC Davis Legal Studies Research Paper Series, Research Paper No. 223

Anderson, D., J.R. Francis, and D.J. Stokes. 1993. Auditing, directorships and the demand for…

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