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Corporate malpractices – Some recent cases of
corporate malfunctioning in foreign countries
[2004] 63 CLA (Mag.) 54
C M Bindal*
While emphasising the need for good corporate governance, Shri Bindal recounts some eye opening cases of malpractices in certain foreign
companies abroad to bring home the point that there is urgent need for monitoring the violations of regulations by Indian companies with a
view to ensuring success of corporate governance, by punishing the errants as promptly as done in Europe.
Corporate governance and bringing to book erring
company/intermediate/other person
1. Corporate governance should help in actual implementation of good governance in an organisation. However, at the same time SEBI and
the Government should be active to monitor and examine the violations made by the companies which mandatorily have to follow the
regulations and code of conduct. If an erring company/intermediate/other person is not punished timely, regulating the law has no meaning
and consequently disclosures, transparency and protection of interest of investors to be adhered to become redundant. Further the success
of the corporate governance depends on the awareness on the part of companies which may be possible through inter action of the
corporate executives with the senior executives of regulators once a while.
1.1 It is unfortunate to state that despite dozens of financial scandals over the past 14 years, the guilty have gone scot-free and investors
consequently lost their money. It is learnt that SEBI’s lawyers have written to the regulator that it cannot be certain of favourable order from an
appellate body because of the poor quality of its investigation. Under this circumstances how can an ordinary person being victim of a market
scam save himself when investigation made by an expert agency being regulatory body is deficient and faulty.
1.2 We are all aware of several hundreds of vanishing companies in India which vanished from the scene after mobilising funds through IPOs
several years before and their managements remain scot-free with no positive action as yet and lakh of investors have lost their money. How
despite the strict supervision by the RBI over the banks in the country, Global Trust Bank and Nedungadi Bank failed and the depositors
suffered heavily. Thus, it calls for actual timely monitoring, regulations, and prompt punitive action against the erring
company/intermediate/other person. Framing of more regulations is neither tenable for helpful. Where public shareholders and institutional
holders are not alert in exercising their rights in company meetings, the regulator has still greater responsibility to monitor ethical standards
practised by companies.
1.3. It is no denying the fact that ultimate responsibility of being ethical and moral remains with the companies. The companies like Shell,
Reliance, Tata and such other groups are attentive to their reputation as good neighbours. Corporate social responsibility is their name for
this, and they publish fat reports to show that they diversify, act ethically and serve social responsibilities for the benefit of society. Still neither
erring by companies nor by concerned individuals can be expected in view of the general human nature being what it is.
Cases of malfunctioning by companies
1. It will be eye opening and advantageous to familiarise ourselves with certain cases of malfunctioning by outside companies as in the paras
that follow. It will be equally worthwhile to note therefrom that bad practices adopted by bodies corporate in European countries are
promptly curbed and stern actions are taken against the errants to comply with better corporate governance rules and measures in the
interest of stakeholders, something that calls for emulation by us.
2.1 Dramatic dropping of over 9 bn pound bid for Marks & Spencer in London – Mr. Philip Green, chief executive, who dramatically dropped
his 9.1 bn pound bid for Marks & Spencer, blaming the retailer’s Board for blocking a formal offer, walked away after nearly 3000 small
shareholders offered almost total support to the Board at an annual general meeting of Marks & Spencer on 14th July, 2004 in London owing
to a tussel between him and the new chief executive, Mr. Stuart Paul, who came out to keep order and whipped up the waiting crowd
promising a momentous meeting. The Board of Marks & Spencer backed Mr. Myners, who resisted the urge and it was straight down to the
business. It was clarified to large gathering of shareholders that Marks & Spencer had made fashion mistakes in the last year. Having unveiled
his plan, he assured the audience a great future to a great company with a fantastic brand which has been failing to deliver for some time.
Then there were free lunches in plastic coolbags for all. Small shareholders speak for about 20 per cent of Marks & Spencer’s shareholders.
They own shares in Marks & Spencer because they like shopping in Marks & Spencer stores. The Takeover Panel had given Mr. Green four
weeks time to continue blustering about, issuing threats, declarations of outrage and funny one-liners all in equal measure.
2.2 Setback of unlimited liabilities for audit firms – The auditors suffered a setback when the office of Fair Trading, UK, said it did not agree to
introduce a cap to their liabilities. Since the demise of Andersen, the world’s four largest accounting firms, have argued that unlimited liability
claims from the creditors of collapsed audit clients could destroy another firm. The belief is that any form of cap design might distort
competition. It will be important to ensure that there are no competition. It will be important to ensure that there are no anti-competitive effects.
Top audit firms were disappointed with the findings. The major audit firms cannot re-insure since the risks are too high. Instead they have set
up captive insurance funds that they pay into annually. However, the audit firms are still hopeful that proposals for reform may be included in
the Companies Bill in September 2004. Thus, the auditors have unlimited liabilities from the creditors of their collapsed audit clients even if
there is no default on their part in serving as auditors.
2.3 Payment of bribes by a British firm to obtain a lucrative contract – The British authorities are examining allegations that a firm controlled by
the Mabeys, one of Britain’s richest families, paid bribes to gain a lucrative contract to build 116 bridges all over Papua New Guinea. Top
management of company has denied the allegations. The firm’s overseas contractors, primarily in the Phillippines and Papua New Guinea, are
stated to be exceptionally lucrative and the firm distributed good dividends in 2001 and 2002. However, the Serious Fraud Office declined to
comment. An international inspection team from the Organisation for Economic Cooperation and Development (OECD) is currently examining
into the matter.
2.4 Revolt at the annual general meeting by the shareholders of Vodafone in UK – The shareholders of Vodafone whose shares under-
performed angered and revolted at the annual general meeting held in July in UK. Chairman, Lord Mac Laurin, defended the company’s lack
of communication with shareholders. Shareholders expressed concern at the use of company money to buy-back shares with no apparent
result, generous pay packages and so on. Mr. Arun Sarin, chief executive, explained that the share price had suffered because of
nervousness over the switch to a third generation network. Mr. Ken Colvert, a small shareholder, even said “we are the risk takers and you are
the money takers”. The Board members had really tough time to satisfy the angered shareholders.
2.5 Dismissal of chairman just after ten weeks of shortlived glory – Mr. James Wilde, chairman of Rentokil, was dismissed just in ten weeks
after giving him full backing. The decision was made after investors had expressed some concerns as to whether Mr. Wilde was the right man
for the job. Mr. Wilde perhaps suffered from an lawful presentation at Rentokil’s annual general meeting at the end of May 2004 when some
shareholders questioned his suitability for the job and attacked him for a halting, verbose and unrehearsed speech.
2.6 Charges of accounting fraud against American drugs company – American drugs company – Bristol-Myers Squibb – agreed to pay
Regulators : $ 150m (£ 82 m) to settle charges of accounting fraud penalty of $ 100m and deposit of $50 m into a fund for shareholders. The
Securities and Exchange Commission accused the firm of inflating sales by encouraging wholesealers to overstock its products. It said that
from the first quarter of 2000 to the end of 2001 it inflated sales by $1.5 bn to make it appear the firm had met Wall Street analyst’s
expectations. The Regulator is still investigating the conduct of the individuals involved.
2.7 International accounting standards for listed companies in UK from January 2005 – Listed companies in UK have been asked to use
international accounting standards from January 2005. Britain’s top 25 companies will see their profits cut by an average of 5 per cent
because of a proposed accounting change. the survey by Haliwell Consulting has found that the leading 25 companies in the FTSE 100 share
index will incur an average cost of £ 68 m each because of a rule requiring them to treat awards of stock options as expenses.
2.8 Appointment of two non-executive independent directors by Cranswick to comply with rules of corporate governance – Cranswick, the
Yorkshire manufacturer of food for man and beast, is moving to allay investors’ concerns about its governance with the appointment of a new
non-executive director and plans to name a senior independent director. The retiring chairman outlined the changes at its annual general
meeting. As the company had imbalance between executive and non-executive directors, the Association of British Insurance brought a red
alert on it. Thus, two non-executive independent directors are being named to join its Board to comply with the rules of corporate governance.
2.9 Charge of breach of fiduciary duty by US listed publisher Hollinger International’s review committee – Lawyers for Hollinder Inc. told the
court in US Hollinger International’s corporate review committee set up after Lord Black’s removal as chairman that chief executive may have
breached his fiduciary duties by not fully considering alternatives to the telegraph sale. The US Judge while deciding whether to allow a
shareholder vote on Hollinger International’s £ 665 m sale of the Telegraph, has asked for a five-year break-down of payments made by
Hollinger International and subsidiaries including the Telegraph group to executives led by Lord Black, and to Hollinger Inc. and Revelston, the
holding company, behind the US listed newspaper publisher. The court has questioned Hollinger Inc.’s motives in bringing the action, and
what savings Hollinger International might have enjoyed with different management.
2.10. US billionaire Mr. Kirk Kerkorian faces fresh controversy of insider trading – Mr. Kirk Kerkorian, the US billionaire, faced fresh
controversy of insider trading. A group of investors claimed Mr. Kerkorian had privileged information when he sold 7.6 m Daimler Chrysler
shares in 1999 for $ 666 m just before the body corporate announced poor results that sent the stock tumbling. According to a law suit filed in
California, Mr. Kerkorian allegedly saved $ 120 m from well-timed shares sales. The court is considering the case of insider trading.
2.11 Serious knocks to credibility of banking industry world wide – As being investigated, the level of insider involvement in banking fraud in
Britain has become progressively more apparent. Main cause has been the use of unvetted temporary staff and their greater access to the
technology. Thus, the banking industry worldwide has received several serious knocks to its credibility as a secure place for public money in
the recent past. It was also revealed that Mr. Fred Clough, the disgraced finance director of collapsed trade finance house, Versailles, had
worked for a number of firms including ICL despite holding a criminal record and having been expelled from the Institute of Chartered
Accountants.
2.12 A number of financial services firms in UK banned from doing business – The Financial Services Authority (‘FSA’) has stated that
nineteen financial services firms were banned from doing business in the past year for breaches of regulations. More than 100 small
businesses had to change how they operated to improve serious failings. Two people with fraud convictions were banned from working in the
financial sector.
2.13. British company banned for serious case of mis-selling precipice bonds – FSA of UK banned David M Aaron Ltd. for one of the most
serious cases of mis-selling precipice bonds. Thousands of precipice bond victims would be in line for compensation following the decision by
watchdog, FCA, and claims are estimated upto £ 100 m. Mr. Andrew Procter, FSA Director of Enforcement, said that the problems within
Aaron were systemic and went to the very heart of the way the firm operated. The firm through independent penal lists being journalists
created a misleading impression that the product was either of a low risk or suitable for a cautious investors.
2.14 Nigerian demand for exclusion of US oil services company from new business in Nigeria for alleged bribery case involving one of its
subsidiaries – Nigeria’s Parliament has demanded that the US oil services company, Halliburton, be excluded from new business in the
country until the end of investigations into a $ 180 m alleged bribery case involving one of the company’s subsidiaries. It was based on the
recommendation of public petitions committee which examined the matter. However, the investigators are probing into the matter.
2.15 Swedish financial services group plagued by scandals – Skandia, the Swedish financial services group, plagued by scandals over
management perks was fined SKr 2.7m ($360,000) by the Stockholm Stock Exchange for misleading, incomplete and incorrect information in
its annual report for the year 2000. The Exchange’s disciplinary committee found information about benefits awarded to Lars-Eric Peterson,
former chief executive and details of bonus schemes were not adequate.
US Chambers of Commerce sues SEC demanding that a
controversial new rule framed by it be overturned
1. The US Chamber of Commerce has for the first time sued the Securities and Exchange Commission (‘SEC’), demanding that the
Regulator’s controversial new rule, requiring mutual funds to have an independent chairman, be overturned. The move shows that business
groups are preparing to dig in their heels and resort to legal action to stop unpopular SEC Regulation. The General Counsel at the Chamber
of Commerce is of the view that the SEC has overreached its authority, resulting in a rule that is bad for investors and contrary to the intent
of Congress. The SEC is also facing opposition to its plan to require hedge fund managers to register with it.
Generally Accepted Accounting Principles lose credibility after
Enron scam
1. It may not be out of place to mention that corporate crimes and irregularities in European and western countries are being dealt with
objectivity and in a result-oriented manner, as a result of which the decisions are made faster and quicker. The business community has
also made efforts to establish its rights by pointing out the cases of over-regulation by a regulatory body. Every one appreciated the
Generally Accepted Accounting Principles (‘GAAP’) for full transparency in accounting. However, the said principles have hardly any
credibility after the Enron Scam revealed that Arthur Andersen, external auditor, manipulated the document whereas its duty was not to
permit the manipulation.
Conclusion
1. Rules for corporate governance are constantly changing and are being improved upon from time to time to avoid pitfalls, inherent business
ills and other short-sighted considerations so as to bring better disclosure and transparency in the overall interest of stakeholders. However,
any extent of punitive action cannot prove panacea for eradication of the corporate ills altogether, as it depends more on the reputation and
goodwill of management. Christopher Fildes stated that “Goodwill is hard to measure, auditors prefer to write it off. Cynics define it as the
difference between what you pay for something and what it proves to be worth. It can amount to a hidden reserve, until it turns out to have
been overstated”.
FOOTNOTES
*Company Secretary in Practice Jaipur
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