CORPORATE GOVERNANCE

✅ UNIT 3: GLOBAL CORPORATE FAILURES AND

INTERNATIONAL CODES

BCCI (United Kingdom), Maxwell (United

Kingdom), Enron (USA), World.Com (USA),
Vivendi (France), Lehman Brothers; Sir
Adrian Cadbury Committee 1992, SOX 2002,
OECD Principles of Corporate Governance.

🔴 SECTION A: GLOBAL CORPORATE FAILURES

1. BCCI – Bank of Credit and Commerce

International (UK)
🏦 Background:
 Founded in 1972 by Pakistani banker Agha Hasan
Abedi.
 Had over 400 branches in 78 countries.
 Marketed as a bank for the developing world but
secretly operated as a fraudulent institution.

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 💥 How the Collapse Happened:
 Complex Structure: Operated through multiple
layers of offshore companies to obscure ownership
and activities.
 Criminal Activity:
o Laundered money for drug cartels and

terrorists.
o Engaged in illegal arms trafficking.

 Regulatory Arbitrage: Registered in

Luxembourg and Cayman Islands, exploiting
weak regulatory environments.
 Auditor's Failure: Audited by Price Waterhouse,
but they failed to detect fraudulent accounting until
late.
 Whistleblowers and U.S. customs eventually
exposed the scam.
📉 Collapse:
 Shut down by the Bank of England in 1991.
 $20 billion in estimated losses.
👨⚖️ Involved Factors:
 Management: Agha Abedi orchestrated most of
the fraud.
 Auditors: Failed to flag irregularities.
 Regulators: Delayed action despite early warnings.
 Lack of internal controls and accountability.

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2. Maxwell Communications Corporation (UK)
�♂️ Background:

 Owned by Robert Maxwell, a flamboyant media

mogul.
 Owned Mirror Group Newspapers and other
publishing firms.
💥 How the Collapse Happened:
 Maxwell secretly transferred £460 million from
employee pension funds to support his failing
empire.
 Created complex inter-company transfers to hide
financial trouble.
 Used company funds to buy shares and artificially
prop up stock prices.
📉 Collapse:
 After his mysterious death in 1991 (falling off his
yacht), the fraud was discovered.
 His companies collapsed under massive debt and
misappropriation.
👨⚖️ Involved Factors:
 Management: Maxwell held absolute control; no
one questioned him.
 Board: Was passive, lacked independence.
 Auditors: Failed to detect pension fund transfers.

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  Regulators: Had no effective mechanism to protect
pensioners.

3. Enron (USA)
🏢 Background:
 Leading energy and commodities trading company
based in Houston, Texas.
 CEO: Jeffrey Skilling, Chairman: Kenneth Lay,
CFO: Andrew Fastow.
💥 How the Collapse Happened:
1. CFO Fastow created Special Purpose Entities
(SPEs) to move debt off Enron’s balance sheet.
2. These SPEs bought Enron’s assets and paid using
Enron’s own stock—creating a fake revenue loop.
3. Inflated reported earnings and hid real liabilities.
4. Board and Audit Committee approved these
arrangements without understanding the risks.
5. Arthur Andersen, the auditor, shredded
documents and overlooked major frauds.
📉 Collapse:
 In 2001, a whistleblower (Sherron Watkins) alerted
leadership.
 Enron filed for bankruptcy, losing $74 billion in
value.
 22,000 employees lost jobs and retirement funds.

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 👨⚖️ Involved Factors:
 Top Executives: Actively orchestrated and
benefited from the fraud.
 Auditors: Arthur Andersen compromised
independence for consulting fees.
 Board: Failed to monitor or question risky
practices.
 Investment Banks: Enabled shady SPE
transactions.

4. WorldCom (USA)
🛰️ Background:
 One of the world’s largest telecom companies.
 CEO: Bernard Ebbers
💥 How the Collapse Happened:
1. Telecom industry decline led to falling revenues.
2. Management capitalized line costs (a normal
expense) to inflate profit margins.
3. Over $11 billion in expenses were misclassified.
4. Internal audit uncovered the fraud, bypassing the
board and CFO.
📉 Collapse:
 Declared bankruptcy in 2002.
 Massive investor and employee losses.

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 👨⚖️ Involved Factors:
 CEO Ebbers: Pressured staff to “make numbers
work.”
 Board: Allowed unchecked power and rubber-
stamped decisions.
 Internal Audit: Disempowered until one employee
exposed the fraud.
 Regulators: SEC intervened post-collapse.

5. Vivendi Universal (France)

🎬 Background:
 French media conglomerate led by CEO Jean-
Marie Messier.
 Aimed to create a global media empire through
rapid acquisitions.
💥 How the Collapse Happened:
1. Took massive debt to acquire US-based Seagram,
Canal+, and others.
2. Used creative accounting to portray profits.
3. Failed to disclose true financial situation.
4. CEO Messier purchased a $17 million New York
apartment using company funds.
📉 Collapse:
 In 2002, revealed a €13 billion loss.

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  Stock collapsed; credit rating downgraded to junk.
 Messier was fired; faced lawsuits.
👨⚖️ Involved Factors:
 CEO: Autocratic control and lavish spending.
 Board: Lacked financial acumen and was loyal to
Messier.
 Investors: Misled by false earnings reports.
 French Regulators: Took delayed action due to
complex structure.

6. Lehman Brothers (USA)

🏦 Background:
 Global investment bank founded in 1850.
 Key players: CEO Richard Fuld, risk managers,
and board members.
💥 How the Collapse Happened:
1. Invested heavily in subprime mortgage securities.
2. Used Repo 105 accounting trick to move $50
billion off balance sheet.
3. Credit rating agencies ignored warning signs.
4. Board and risk committees failed to understand or
manage exposure.
5. US Federal Reserve refused bailout.

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 📉 Collapse:
 Filed for bankruptcy in September 2008 with $613
billion debt.
 Sparked global financial crisis.
 Triggered panic in stock markets and collapse of
consumer trust.
👨⚖️ Involved Factors:
 Top Executives: Over-leveraged and took risky
bets.
 Board: Inactive and financially illiterate.
 Regulators: Failed to supervise complex financial
instruments.
 Rating Agencies: Gave AAA ratings to junk
assets.

🔵 SECTION B: INTERNATIONAL
CODES OF CORPORATE
GOVERNANCE

1. Sir Adrian Cadbury Committee Report (1992)

� Purpose:

To restore public trust in companies after scandals like

Maxwell.

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 📌 Key Recommendations:
 Clear division between Chairman and CEO roles.
 Appointment of independent non-executive
directors.
 Formation of an Audit Committee.
 Annual reports must reflect a true and fair view of
financials.
🌍 Global Influence:
 Introduced the "Comply or Explain" approach.
 Influenced codes in India (Clause 49), South
Africa, Malaysia, etc.

2. Sarbanes-Oxley Act (SOX), 2002 – USA

📖 Background:
Introduced by U.S. Congress in response to Enron and
WorldCom.
📌 Key Sections:
 Section 302: CEO and CFO must certify accuracy
of financial reports.
 Section 404: Companies must evaluate and report
internal controls.
 Section 802: Imposes penalties for destroying or
altering documents.

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  Creation of PCAOB: Supervises auditing
practices.
👨⚖️ Impact:
 Raised cost of compliance.
 Improved accuracy in financial reporting.
 Promoted whistleblowing protections.

3. OECD (Organisation for Economic Co-

operation and Development) Principles of
Corporate Governance (1999, 2004, 2015)
📖 Purpose:
To provide a universal framework for corporate
governance.
📌 6 Principles:
1. Effective governance framework
2. Rights of shareholders
3. Equitable treatment
4. Role of stakeholders
5. Disclosure and transparency
6. Board responsibilities
🌍 Impact:
 Accepted by G20 and many national governments.

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  Used to assess corporate governance standards
globally.

📝 CONCLUSION
These global corporate failures highlight how ethical
collapse, board inefficiency, auditor compromise,
and regulatory lapses can bring down even the biggest
corporations. The international codes and reforms
(Cadbury Report, SOX, OECD) offer essential
frameworks for preventing such disasters by
emphasizing transparency, accountability, board
oversight, and risk management.

✅ UNIT 4: Corporate Governance Regulatory Framework in India

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 Regulatory framework in India: Kumar Mangalam Birla (1999),
NR Narayana Murthy Committee (2005), Relevant provisions of
Companies Act, 2013, SEBI: Listing Obligations and Disclosure
Requirements Regulations (LODR), 2015 and Uday Kotak
Committee (2017)

🔸 1. Kumar Mangalam Birla Committee

Report (1999)
🔹 Formed by: SEBI

🔹 Purpose:
 Improve the standards of corporate governance in listed
companies.
 Enhance investor confidence.
 Introduce transparency and accountability.

🔹 Key Recommendations:
1. Board of Directors
o Composition: Minimum 50% non-executive

directors.
o If the Chairman is an executive director, at least

half the board must be independent directors.

o Definition of Independent Director introduced.

2. Audit Committee
o Minimum 3 members, two-thirds of whom must be

independent.
o Chairperson should be an independent director.

o Meetings should be held at least thrice a year.

3. Disclosure Norms

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 o Detailed disclosures of financial performance,
related party transactions, and risk management.
o Management Discussion and Analysis (MD&A)

should be part of the annual report.

4. Shareholder Information
o Information on general meetings, dividend policies,

and investor grievances to be disclosed.

5. Compliance
o Mandatory compliance for listed companies through

Clause 49 of the Listing Agreement.

🔹 Impact:
The recommendations were incorporated into Clause 49 of
the Listing Agreement by SEBI, becoming the cornerstone
for corporate governance compliance in India.

🔸 2. Narayana Murthy Committee Report

(2003/2005)
🔹 Formed by: SEBI

🔹 Purpose:
To review Clause 49 and further strengthen corporate
governance norms.

🔹 Key Recommendations:
1. Responsibilities of Audit Committee
o Oversight of financial reporting, internal control,

and whistle-blower mechanism.

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 o Review of quarterly and annual financial statements
before submission.
2. Quality of Financial Disclosures
o More transparency in disclosures related to:

 Related party transactions.

 Loans and advances to subsidiaries.

 Proceeds from public/rights/preferential issues.

3. Risk Management
o Companies should lay down procedures for risk

assessment and minimization.

4. Code of Conduct
o Separate code of conduct for the Board and Senior

Management.
5. Whistle-blower Policy
o Mandatory implementation of a Whistle-blower

mechanism for employees.

🔹 Impact:
Amendments made to Clause 49 in 2004 were largely based
on the recommendations of this committee, especially with
respect to internal controls and disclosures.

🔸 3. Companies Act, 2013

🔹 Purpose:
To provide a modern framework for corporate regulation and
governance.

🔹 Key Provisions Related to Corporate Governance:

1. Independent Directors (Section 149)

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 o At least 1/3rd of the board must be independent
directors in listed companies.
o Tenure: Not more than two consecutive terms of 5

years each.
2. Board Committees
o Audit Committee (Section 177): Mandatory for

listed and large companies.

o Nomination and Remuneration Committee

(Section 178): For deciding key appointments and

their remuneration.
o Stakeholders Relationship Committee: For

resolving grievances.
3. Woman Director (Section 149)
o At least one woman director is mandatory in

specified class of companies.

4. Performance Evaluation (Section 178)
o Annual evaluation of performance of the board and

its members.
5. Corporate Social Responsibility (CSR) (Section 135)
o 2% of average net profits of the last 3 years to be

spent on CSR by specified companies.

6. Vigil Mechanism (Section 177)
o Mandatory for listed companies and others to

establish a whistle-blower policy.

7. Disclosures and Transparency
o Directors’ report to include details of financial

performance, board meetings, remuneration, etc.

🔸 4. SEBI (Listing Obligations and

Disclosure Requirements) Regulations,
2015 – LODR
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🔹 Objective:
To consolidate and streamline the listing and disclosure
obligations for listed companies.

🔹 Key Provisions:
1. Board Composition
o At least 50% non-executive directors.

o Minimum 1 woman director.

o If Chairman is non-executive, at least 1/3rd

independent directors; if executive, then at least

50% independent.
2. Audit Committee
o Must have at least 3 directors with two-thirds being

independent.
o Chairperson must be independent.

3. Nomination and Remuneration Committee

o Minimum 3 directors, all non-executive, and at least

50% independent.
4. Stakeholders Relationship Committee
o Looks into investor grievances, share transfers, etc.

5. Risk Management Committee

o Mandatory for top 1000 listed companies.

6. Disclosures
o Detailed quarterly, half-yearly, and annual

disclosures.
o Policy disclosures: dividend distribution, material

subsidiaries, related party transactions, etc.

7. Compliance Certificate
o CEO/CFO certification on financial statements.

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🔸 5. Uday Kotak Committee on Corporate
Governance (2017)
🔹 Formed by: SEBI in 2017

🔹 Purpose:
To enhance standards of corporate governance for listed
entities.

🔹 Key Recommendations:
1. Board Composition
o Minimum 6 directors on the board of listed entities.

o At least 1 woman independent director.

2. Separation of Roles
o Separation of the roles of Chairperson and

CEO/MD for better governance (especially in top

500 companies).
3. Enhanced Role of Audit Committee
o Reviewing utilization of loans and advances

from/investment in subsidiaries.
4. Minimum Number of Board Meetings
o At least 5 board meetings in a year, with one

meeting exclusively on strategy, risk, and

governance.
5. Attendance and Membership Caps
o Maximum of 8 directorships in listed entities (with

a phased implementation).
o Attendance record of board members to be

disclosed.
6. Related Party Transactions (RPTs)
o Stricter approvals and enhanced disclosures.

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 7. Disclosure of Auditor Credentials
o Detailed reasons for resignation of auditors and

audit qualifications to be disclosed.

8. Stakeholder Engagement
o Greater emphasis on shareholder rights and

grievance redressal.

🔹 Impact:
SEBI accepted and implemented many of these
recommendations through amendments to the LODR
Regulations in 2018.

📌 Conclusion
India's corporate governance framework is a mix of legal
mandates, voluntary best practices, and regulatory
enforcement. The Companies Act, 2013 provides the
statutory framework, while SEBI’s LODR Regulations
ensure compliance for listed companies. The Kumar
Mangalam Birla, Narayana Murthy, and Uday Kotak
Committees have each played a key role in the evolution of
governance practices.

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