The buzz surrounding Corporate Governance is on an all-time high in this decade of Enron, Worldcom and Satyam. The severe repercussions faced by every common person of our global business ecosystem has suddenly made Corporate Governance a common phrase for every stakeholder in economy.

Typically, Corporate Governance gives vibes of a crisis, due to the numerous and big business failures we have faced in last few years. However the goal of Corporate Governance is much more positive. Put simply, Corporate Governance is about promoting Corporate Fairness, Transparency and Accountability towards all stakeholders – shareholders, employees, customer, suppliers and immediate community. It thus works as a corrective mechanism which ensures sustained benefits for all stakeholders. The role of Corporate Governance becomes even more critical in case of mergers. In today’s brief session, we would discuss certain aspects Corporate Governance and see how it takes care of shareholders, employees and community.

Lets talk about shareholders first

The most important issue concerning the shareholder is likely the impact of the merger on the valuation of their equity capital. This is justified on the basis of the acquiring company expertise, inputs, synergies; etc the acquired business would lead to improved cash flows than what would have been possible had the business continued on its own.

It is necessary in case of acquisition to insure that promoters or controlling group of the acquired co. or their associates do not compete with the acquiring co. in the same line of business for a reasonable period of time.

One or more directors of acquiring co. may be on the board of the acquired co. If so there would be apparent perception of conflicts of interest even though the individual must be acting in the best interest of the shareholders.

Good practice demands that interested directors disclose their interests as required by law &they must refrain from exerting any direct or indirect exercise.

Even in respect of valuations, it is good practice to employ two set of valuers to conduct the exercise. One set of valuers should be appointed by majority sh. Holders & another should represent the minority interest.Their independent valuation could be discussed and reconciled to arrive at fair value.

So can the attempt of CEO of Satyam computer, Ramalinga Raju, to purchase the twin company Maytas infra and Maytas properties be regarded as an attempt to bypass the principles of Corporate Governance?

The decision was not made taking into confidence all the stakeholders. The two sons of Raju were major interested party in the twin companies. The deal would have made the cash rich Satyam into a debt ridden company as it’s entire holding of $1.3 billion cash would have gone to Maytas Properties and in Maytas Infrastructures. Importantly, Ramalinga Raju was holding only 8.5 per cent stake of Satyam computer to take such critical decisions! The economic  rationale of entering real estate in name of diversification is already a much discussed topic and I need not elaborate further

Thus, leading to the fall of India’s 4th largest software co.

From perspective of employees, it is important to note that since

The merged business is virtually independent of operations of acquiring co., there is bound to be duplication at management & supervisory levels in a combined entity. For example, the CEO of the acquired co. is retained to be head of combined operations. Employee of acquired co. will be concerned that their chief is crossed over to other side while those of the acquiring co. will fear that now head will favor his earlier team. Such situations should be tactfully handled with full transparency and adequate communications. Managing workmen at junior & middle level is also a sensitive component.

Let us understand it through example of HP –Compaq merger

Hp-Compaq made a huge and disciplined effort to smartly and sensibly deal the people’s issue. After the initial announcement, the first step they took was to place face-to-face the troops, and share with them as much information as possible.

They established a merger mentor program, whereby they put all their people managers through a training course designed to help them more effectively lead their team in a period of ambiguity and uncertainty. They also ran a weekly management teleconference; open to all managers, where they could discuss how the business was traveling, and many other issues people wanted to bring up.

One very important thing that they did in the period was to roll out a series of aggressive performance targets for the business to achieve together with the associated demand-generation programs. The level of detail in the planning was really apparent. On the day the new company launched, the top three levels of management had already been appointed globally, the product road maps had been finalized, the new web site was up, and an enormous amount of analysis had been done of key customer accounts.

This high level of readiness was a result of the level of resources dedicated to Corporate Governance aspects of their merger.

Corporate Social Resposibility is increasingly becoming a critical component of successful Corporate Governance

The acquired co. may have undertaken certain corporate social responsibility programmes. In the event of any alteration in these programs, the decision should be properly and timely communicated so that misrepresentation or misunderstanding do not happen.

Arcelor Mittal’s merger in Year 2007 is a good example of high standards & best practices of Corporate Governance in several aspects. The management developed a detailed community engagement manual for this merger.

The engagement process helped local operations map their different stakeholder groups, understand their issues, and develop effective action plans, which could be monitored and measured.

Each local CEO was accountable for the corporate responsibility programmes in their area, and  expected to put in place a clear management and governance structure to help them do this. A key element of this was establishment of local corporate responsibility forums to review and monitor local progress. This included line managers from Human Resources, Environment, Health and Safety, Legal, and other operational departments.

The company too developed action plans in partnership with regional management for governance structures, policy development, stakeholder engagement programmes, audit processes, training, and the selection of metrics and targets to assess performance.

Corporate Governance is an emerging field. Its more than mere art and science. Its more to do with ‘ethical quotient’. The focus of Corporate Governance, despite its popularity, is still more on standards and compliances procedures. While that is extremely necessary, what is even more important is to educate companies, corporations, decision makers and stakeholders on how highest levels of ethical standards alone can ensure sustained growth, avoidance of unwarranted crises and provide any meaning to their relentless pursuit of profit maximization. Examples of recent Corporate Governance failures reinforce the childhood lesson of ‘As you sow, so shall you reap!’. In today’s connected world, ‘Any deviation from highest standards of ethics will eventually come back to you with much more magnified impact’. This should be imbibed in the system and Corporate Governance should ideally become not an external enforcement but an internal motivation for everyone. This is more so valid in the sensitive matters of mergers and acquisitions.

In today’s connected world, “countries, governments and companies also have character, and their character is how they do, what they do, how they keep promises, how they make decisions, how things really happen inside, how they connect and collaborate, how they create trust, how they relate to their customers, to the environment and to the communities in which they operate .

In short, how they do is becoming more crucial than what they do.

To a large extent many financial institutions had stopped asking how they were making money, as long as they continued to make more money. How often do we see this manifested in the organizations we worked for and represented? We were so intent on a goal that we lost sight of how we are going to accomplish that goal and the potential destruction we left in the wake of getting there.

This is about the value that developed in the market in recent years. We moved away from the old cliché ‘my word is bond’ to a culture and atmosphere where, I don’t need to think about the underlying right or wrong, suitability or unsuitability. So far there is a market for it.

But the recent economic holocaust seems to have revived the relevance of the old cliché.

The corporate scandals that have rocked Wall Street have shaken the public’s trust in the way companies do business. In midst of these changes, increased connectivity now enables greater access to information that was once private and hidden away from public. The only way for companies to thrive in this new transparent world is to put professional business ethics at the core of how they conduct business, demonstrating that they have nothing to hide.

Just to give an idea of what it means let us look at recent brushes of some leading corporate and its subsequent effects.

Enron – an accounting scandal, leading to destruction of evidence, shredding of important documents whilst keeping shareholders completely in the dark with artificially bloated stock prices and false earnings.

The result: The largest corporate crime of the present era, the company goes bankrupt, thousands lose their savings and the story is still being talked about as an example of what not to do in corporate/business ethics violation.

The Satyam story is already making headlines in the newspaper.

We also have example of Tyco International which became embroiled in a massive scandal in 2002. However it was able to act quickly & rebuilt its corporate reputation. It made a turnaround with specific emphasis on Professional Ethics in 5years.

So let us look at some of the success mantras in Professional ethics:

• Mentoring and education

In Tycos case, they renewed its focus on “mentoring, teaching and education” of Tyco employees at all levels of the company — especially new hires.

In fact, Companies that want to avoid corruption must develop ongoing programs to train and mentor “high-integrity” employees.

• Web of accountability

Companies must develop a web of accountability around employees at all levels of management — including the chief executive officer. These systems of checks and balances must include a discipline process to hold people accountable for ethical violations

• Engaged shareholders

Too many investors simply care about the bottom line, and they don’t pay close attention to issues such as ethics and integrity as long as their stock values are climbing.

This apathy comes with a price. Boards and senior leadership teams that want to protect shareholders must develop and implement sophisticated reviews to evaluate the character of senior management.

Tyco too, after the fallout in the 2002, Tyco established an ombudsman, a senior vice president of corporate governance and an internal auditor who all report directly to committees of the board of directors.

“Those committees had the right to select and remove the people in those three jobs..

Our own Tata is a great example where corporate ethics is written in the form of a rule book adhered to call the famous “TATA code of conduct”. I believe the TATA’s are a respected business family in India for the last 100+ years and their code of conduct is something to cheer for!

Companies – large or small – should conduct themselves in a proper way if they are to succeed and maintain their competitive advantage in today’s hyper competitive world with skills of ‘integrity’, ‘ethics’ and ‘transparency’.

Many corporations are stepping up their efforts to apply these three lessons.

Even individuals must decide before they take any corporate job what their values are?

“I need you to ask yourself one question,” And that question is: What are the principles that you live your life by, that you’re willing to lose your job for? What are those non-negotiables in your life that you would stand for, no matter what?”

The world needs to initiate a fundamental review of its institutions – what a recent gathering of the World Economic Forum’s Global Agenda Councils called a ‘fundamental reboot’. To do this we will need to pass beyond the current ‘long age of forgetting’ – an age in which we have lost sight of the purpose of our core institutions and therefore betray them with blind hypocrisy. That is, we need to return to the ethical roots of society and the economy that is supposed to serve its interests.

This crisis has given an opportunity to rethink if ethics will simply disappear in the battle for survival, or if it will become the foundation on which we build our future.”

“What we now need is not a level playing field, but a loyal playing field,”

“We have thousands of pages of regulations, and countless publications and yet nobody could understand what happened. If you speak of uncertainty, the only solution is trust. And, trust comes from human values” & remember it all eventually comes back to you. More so quickly in todays connected world.

Be the Change You Want to See in the World