 |
|
|
|
|
Vol
4: Issue No.3 : March, 2004 |
|
| Hony.
Editor |
|
Dr.
Bindi Mehta
(Director,
Research at ICSI - CCRT, Formerly, Chief economist, CRISIL)
|
|
   
   
   
    |
|
| International
Events |
| US
corporate governance rules give
local companies a tough time
|
All
Indian companies listed on US exchanges,
whether it’s the NYSE or Nasdaq, will
soon have to adhere to a new set of
very stringent and may be very cumbersome,
corporate governance rules. More importantly,
besides putting in place new systems
and procedures, some of these rules
call for a complete change in mindset.
Indian
Companies may not be familiar with
a separate committee set up mainly
for identifying prospective directors
for the company ? Or, for that matters
statutory auditors being subjected
to a thorough review by another audit
firm? Or, a new definition of independence
when it comes to determining whether
or not your director is independent?
All this and more is part of the new
corporate governance rules. The watchdog
for US capital markets, the Securities
and Exchange Commission, had late
last year approved of the new corporate
governance rules suggested by NYSE
and Nasdaq. Companies listed on these
exchanges, including foreign issuers,
such as Indian companies, have to
comply with the new rules by the time
they hold their first AGM on any date
after January 15 this year, or by
October 31, whichever is earlier.
Some
rules are unique to NYSE and Nasdaq.
These also incorporate the provisions
of the Sarbanes Oaxley Act – such
as auditor independence, CEO and CFO
certification of financial statements,
independence of audit committee members,
which are mandatory since August 2002.
|
|
|
|
|
|
|
| |
| Parmalat’s
US subsidiary files for bankruptcy |
Scandal-plagued
Italian food producer Parmalat put its US dairy operations
under Chapter 11 bankruptcy protection during February 2004
and said it will sell them to pay creditors. Its three US
dairy units – Farmland Dairies, its parent Parmalat USA
and its subsidiary Mil Products of Alabama – filed for protection
with the US Bankruptcy Court in New York, after vendors
and bank lenders balked at extending credit.
The
move followed Parma-based Parmalat’s bankruptcy filings
in Italy on December 24, 2003 and later in Brazil and the
Netherlands, in one of Europe’s worst financial scandals.
Eighteen people, including founder Calisto Tanzi, have been
arrested in connection with Parmalat’s collapse.
The
US Securities and Exchange Commission in December charged
Parmalat with securities fraud over a $ 1.5 billion bond
sale. Bank of America, Citigroup and Morgan Stanley are
among seven institutions being probed in Italy in connection
with Parmalat scandal.
Go
to top
|
| The
OECD Steering Group on Corporate Governance |
The
US government could intervene to control executive compensation
if company managers continued the practice of paying themselves
huge sums of money, the head of the accounting industry watchdog
has warned.
There
has been growing concern among investors about executive pay
packages, especially when share price performance has failed
to keep pace with an increase in salaries and award of share
options to chief executives and other senior managers. “If
the anger of the American people continues and business leaders
do not wake up soon, I predict that there will be legislation”,
William McDonough, Chairman of the Public Company Accounting
Oversight Board (PCAOB), said.
The PCAOB
was set up by the US Securities and Exchange Commission a
little over a year ago to craft regulations for the auditing
industry. Currently no accounting firm can audit a publicly
traded company if the accounting firm is not registered with
the board. Mr. McDonough, a former president of the Federal
Reserve Bank of New York, said that as on date, 771 firms
have registered with PCAOB.
Auditors
of US corporations customarily limit themselves to looking
at whether accountants at their client companies have followed
accounting rules or not. But if the PCAOB adopts the proposed
new standards then auditors would also have to go through
piles of invoices, contracts and even observe employees in
charge of controls at the companies.
Go
to top
|
| Now,
US Government may decide CEOs’ pay |
The collapse
of the Parmalat food empire amid billions of euros of debts
reveals a troubling aspect about Italian capitalism - the
lack of effective financial control over its family-owned
companies.
The focus of China's reform of state-owned enterprises (SOEs)
shifted to corporate governance in 2003, after designating
a specified investor representing the rights of state-owned
assets.
In the past 25 years, China has made unremitting efforts to
improve the efficiency of SOEs, including giving SOEs more
management decision-making power, contracting with managers
to improve their performance, and establishing a modern enterprise
system to make SOEs independent players in the market.
But it was still difficult in China to set up an adequate
framework to handle the relations between rights, duties and
interests among the state, the real investors of the SOEs,
and managers.
As shown by developed market economies, corporate governance
is the most effective way to ensure the managers to protect
investors ' interests, economists say. China recognized this
and stated in 1999 that the core task of the modern enterprise
system is to establish corporate governance mechanism.
However, without a tangible investor for state-owned assets,
it is impossible to set up standard corporate governance mechanism,
the major purpose of which is to balance the managers' interests
and those of the investors.
In March 2003, the State-owned Assets Supervision and Administration
Commission of the State Council (SASAC) was established, serving
as the investor of China's 189 major SOEs. The watchdog of
state-owned assets at the provincial and municipal level was
also set up, serving as investors of other SOEs.
With a clear investor in place, China now is able to find
ways to improve corporate governance of SOEs. In October,
the Communist Party of China declared that establishing standard
corporate governance is the main purpose of reform for the
first time in one of its key documents.
The SASAC took a series of measures to improve corporate governance
of major SOEs, the latest being the implementation of an evaluation
method on Thursday. According to the method, the performance
of SOE managers will be assessed by financial indicators and
salaries will be based on corporate performance.
SASAC Director Li Rongrong also stated recently that the commission
will focus on the establishment of directorates in SOEs invested
solely by the state in 2004.
The SASAC hosted its first international forum on mergers
and acquisitions in November, inviting foreign and private
capital to participate in SOE reform. By transforming large
SOEs into joint- stock companies, China is trying to lay the
foundation for a standardized corporate governance system.
Go
to top
|
| Listed
firms in China need better corporate governance: report |
|
Listed firms in China still have much to do to improve their
corporate governance, says a report issued by China's noted
Nankai University based in the northern port city Tianjin.
The report, issued Sunday in Beijing, appraises the governance
status of China's listed firms and says abuse of "related
party transactions" by sole shareholders has impaired the
interests of small shareholders and posed a major problem in
corporate governance.
The corporate governance research center of Nankai University
has in the meantime published China's first corporate governance
index, the "Nankai governance index" to appraise the
independence,protection of small shareholders' rights and interests
and relatedparty transactions of the listed firms. "The
index shows there's much to desire from sole shareholders,"
said Li Wei'an, head of the organization.
The China Securities Regulatory Commission rules that listed
firms should explain in their prospectus, quarterly reports
and application files their gains or losses arising from related
partytransactions in order to improve their accounting system
and protect shareholders' interests. "Still, more systematic
regulations should be drafted to protect the rights and interests
of small shareholders and discipline the behaviors of sole shareholders,"
Li said.
The university's report has also called on listed firms to strengthen
the decision-making capacity of their board of directors, work
out an effective mechanism to stimulate and discipline its management
staff and ensure accuracy and integrity in information disclosure.
Chen Qingtai, vice director of the Development Research Center
of the State Council, said China aimed to improve governance
of listed firms to protect the investors and boost the national
economic growth. "We'll refer to the report and relevant
indices it provided to strengthen the rating system and improve
corporate governance," said Chen. Enditem
Go
to top
|
| Listed
firms in China need better corporate governance: report |
Leading
conglomerates are increasing the number of outside directors
on their boards to strengthen their role in evaluating the
management's performance.
``The move is expected to contribute to improving corporate
governance, bringing change in the traditional corporate culture
where the influence of owners is dominant,'' Kim Sang-cho,
head of the Economic Reform Center under the People's Solidarity
for Participatory Democracy, said.
SK Group set the precedent on Sunday in its annual board of
directors meeting, announcing that it would increase the number
of outside directors from five to seven on the 10-seat board.
It also wants the chairman of the board to be elected by its
members rather than automatically falling under the authority
of the company's president, as it has done in the past.
Originally, SK Corp., the de facto holding company and the
oil refinery arm of the group, had planned to raise the ratio
of outside directors to that level by 2006.
``We made a quick decision to transform the company to be
more transparent and more receptive to shareholder interests
as early as possible,'' the board said in a statement.
``SK Corp.'s management will be led by the board and a transparent
management committee, not controlled by the group owner,''
a SK executive said.
The reorganized board will ask for the confidence of board
chairman Chey Tae-won, who is also SK Corp.'s chairman as
the group owner, in the upcoming shareholders meeting in March.
Although the decision of SK Group was made under pressure
from foreign shareholders, the impact could loom large, with
other leading companies following the suit.
POSCO decided to raise the number of outside directors to
nine from eight on its 15-member board. KT reduced its number
of board members to increase communication efficiency but
the ratio of outside directors to board members was raised
to 66 percent from the current 60 percent.
Many other leading companies are reported to being considering
raising their ratios to more than 50 percent. Samsung Group,
the nation's largest conglomerate, however, has yet to decide
to make a change to the composition of its board. The company
has 14 board members, and half of them are outside directors.
``Companies are on the right track to improve their governance.
With the increase of outside directors, the management will
focus on mapping out business strategies, while outside directors
will act as advisors and counselors to management,'' Kim said.
``To enable outside directors to assume their role, however,
the designation of outside directors must be independent from
the management.''
Go
to top
|
| United
States: NYSE Corporate Governance Requirements Finalized |
|
The Securities and Exchange Commission approved
long-anticipated modifications to the corporate governance listing
standards of both the New York Stock Exchange and the Nasdaq
National Market.1 Hailed by SEC Chairman William Donaldson as
being "at the core of a broad movement by our markets to
enhance the corporate governance practices of the companies
traded on them," the new rules represent a sea change in
the governance of listed companies, mandating stricter measures
of board independence and independent director oversight of
processes relating to corporate governance, auditing, director
nominations and compensation.
The
rules to modify NYSE and Nasdaq listing standards were first
proposed in 2002 when, in response to a series of high-profile
corporate accounting scandals and a resulting loss of investor
confidence in the U.S. securities regulation system, then-Chairman
of the SEC Harvey Pitt requested that the NYSE and Nasdaq, as
well as the other exchanges, review their corporate governance
listing standards. The NYSE and Nasdaq revised their respective
rule proposals numerous times in response to comments from the
public and revisions suggested by the SEC and to conform the
proposed listing standards to Rule 10A-3 under the Securities
Exchange Act of 1934, as amended, adopted by the SEC in April
2003 pursuant to the Sarbanes-Oxley Act of 2002 to prohibit
the listing on any national securities exchange or association
of any security of an issuer that is not in compliance with
certain audit committee requirements. Now in final form, the
new NYSE and Nasdaq rules will trigger a surge of reform by
listed companies, many of which have anxiously delayed corporate
governance changes pending final rules. These
rules have their genesis in the June 2002 recommendations of
the NYSE’s Corporate Accountability and Listing Standards Committee,
and were subsequently refined to comply with the Sarbanes-Oxley
Act of 2002 (SOx) and to generally harmonize them with Nasdaq’s
corporate governance requirements.
Go
to top
|
|
