Environmental, Social and Governance

(ESG)

Class 10

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Agenda

1. The “G” of ESG

2. Governance Factors

3. A case of Governance Failure

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What is Corporate Governance?

A system of principles, policies, procedures, and clearly defined

responsibilities and accountabilities used by stakeholders to overcome
the conflicts of interest inherent in the corporate form.

(CFA Institute)

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CG – Objectives and Guiding Principles

• To eliminate or mitigate conflicts of interest.

• Particularly those between corporate managers and shareholders

• To ensure that the assets of the company are used efficiently and
productively and in the best interests of its investors and other
stakeholders

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Sources of Conflict – Agency Relationships

Management–Shareholder Conflicts
Board of
directors

Shareholders
Managers

Director–Shareholder conflicts

Information Asymmetry between the three players

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Corporate Governance Evaluation
• The board should be comprised primarily of independent directors
(that is, not insiders)

• The Chairman of the Board should be independent;

• Directors should be qualified;

• And, more….

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Impact on Valuation
Evidence suggests that:
• companies with strong governance had greater investment performance.
• companies with strong shareholders’ rights outperformed those with weak
protections.
Benefits from a strong
corporate governance

Risks of weak corporate

governance

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Shareholder Activism and Proxy Voting
• Shareholder activism is any effort by shareholders to communicate a need for
change in a company's policy or management.
• Shareholders take this action based on their rights as owners.

• E.g. Engine No 1 – A Hedge Fund who took on Exxon to change its climate strategy

• Proxy voting is a form of voting where an individual gives their voting power
to a representative to vote on their behalf.
• The representative may be another member of the same organization or an external
entity.

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Agenda
1. The “G” of ESG

2. Governance Factors

3. A case of Governance Failure

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Governance Factors

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Source : CFI
Governance Factors

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Source : CFI
Governance Factors

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Source : CFI
Governance Factors

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Source : CFI
Governance Factors

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Source : CFI
Impact of Governance Factors on Corporations

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Source : CFI
Impact of Governance Factors on Corporations

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Source : CFI
Impact of Governance Factors on Corporations

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Source : CFI
Impact of Governance Factors on Corporations

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Source : CFI
Impact of Governance Factors on Corporations

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Source : CFI
Agenda
1. The “G” of ESG

2. Governance Factors

3. A case of Governance Failure

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The End

The End

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The Beginning and the Prime
• Incorporated in 1987 by brothers B. Rama Raju and B. Ramalinga Raju as Private
Ltd Company
• Went public in 1992
• 4th Largest IT company in India in 2008, with phenomenal global presence and
envious list of clients(several Fortune 500 companies) and partners
• Winner of several awards for innovation, prestige, reputation, human resources
development
• Most importantly, winner of several Corporate Governance awards
• Golden Peakcock award 2002, 2008
• Best corporate practices recognition by IRGR for 2006 and 2007

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Shareholding and Board Structure
• Shareholders(2008)
• Promoter’s holding – 8.74%
• Non-Promoters – 61.1% ( FIIs – 48.09%)
• Others – 30.16%
• Board of Directors
• 5 Independent and 4 Internal members(Raju Brothers, Prof. Palepu, Ram Mynampati)
• Audit and compensation committees – 4 members each, all independent directors
• Functioning of Board and committees
• Audit committee met 8 times and compensation committee met 3 times in the
preceding year
• All governance standards were followed beyond legal requirements

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The Blowup
• Dec 16th , 2008: Satyam Board approves 51% stake acquisition of Maytas
Infra(BSE listed) and 100% in Maytas Properties(unlisted). Rationale was slow
down in IT industry and diversification into real estate.

• Decline 55% in Satyam’s ADR

• Dec 17th, 2008: Acquisition called-off

• Dec 23rd , 2008: World Bank suspended Satyam for 8 years for bribery charges,
but denied the allegations

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The Blowup
• Dec 26th , 2008: Mangalam Srinivasan(Independent Director) resigned taking
responsibility for not opposing the acquisition decision.

• Dec 28th , 2008: Board meeting got postponed for the next day, IL&FS Trust sold
4.41 million shares in open market, family stake dilution from 8.65% to 5.13%.

• Market Cap eroded by 40% in just 2 weeks in December

2018

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No letup in bad news - Jan’2009
• Anonymous email to board stating financial irregularities and lack of
liquidity.
• 3 more independent directors resigned.
• Jan 7, 2009 – Ramalinga Raju resigns and admits to cooking books for
several years
• Profit margins were only 3%, but overstated it
• Justification – to prevent hostile takeover and that he never profited
from cooking the books
• Maytas deal was the last ditch attempt to save Satyam.

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The Tiger
“Riding a tiger not
knowing how to get off
without being eaten.”
Ramalinga Raju, Founder
of Satyam Computers

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The fallout
• Raju arrested

• Share prices fell from a 52-week high of Rs. 544 to Rs. 39.95

• Board replaced by GOI

• Investigations by SEBI, and later CBI

• Lawsuits across the world

• 115 independent directors from other listed companies resigned within one-month
following the scandal

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Breakdown of CG Mechanisms
• Raju and his family had a total of 327 companies registered in their names
• 3 Levels of failure

Internal audit - CFO • Senior Management including CFO

aware of the real state of accounts
External audit – PwC
• PwC got about double the fees it
usually gets from similar IT companies;
Audit Committee –
Independent board allowed accounting irregularities and
member indulged in collusion
• Audit Committee failed more likely
due to omission than commission
• PwC – Did not verify cash and bank balances, and did not detect fake supporting documents
• Fixed deposits were fake
• Rs. 2.36 Billion debt, despite have Rs. 44.62 Billion unused funds(neither distributed as dividends, nor reinvested)

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The aftermath
• Board
• New board appointed by GOI
• Auditors(PwC)
• Audit Head in India resigned
• 2 partners who signed on Satyam’s balance sheet were suspended and
imprisoned
• Shareholders
• Lost heavily
• Acquired by Tech Mahindra at Rs. 58 per share(31%)

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Satyam disappears into Tech Mahindra

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The End for Satyam

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Conclusion
• Corporate Governance is critical to project shareholders

• But good CG is not just about ceremonial adoption of best practices by

firms

• More stringent norms have come in place since then

• “Satyam” has joined “Enron” as the poster boys of Fraud

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Summary
1. The “G” of ESG

2. Governance Factors

3. A case of Governance Failure

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Thank You

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