Indian Institute of Management Kozhikode

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IIM-A gives green light to new pay scale

: The Indian corporate sector has come a long way from license raj days to being the acquirers of global brands and likewise the sophistication of reporting accounts has evolved. World economy saw the fall of Enron, WorldCom thus leading to the introduction of Sarbanes-Oxley Act (SOX), a precedence leading to changes in standards all over the world.

India meanwhile was adjusting to the newfound craze among global investors and the high GDP growth rates which fuelled growth in manufacturing and service industry. As the size of companies was increasing, stakeholder expectations were on a rise and the competitive nature of the market led to tougher competition among the firms thereby leading to increased importance of good corporate governance.

Recently during the global meltdown and credit crisis, we have seen that many Indian firms had issues in the way they report their mark-to-market losses in accounting books. Most companies understated losses to improve the operating margins, and the latest one to fall prey to accounting fraud is Reliance Communication (RCIL).

In 2009, KPMG conducted a survey on corporate governance; respondents included CFO’s, independent directors & COO’s of various firms. The study revealed nearly 80% of respondents felt existing SEBI norms for disclosure are inadequate and scope for improvement exists. This revelation came true with the Satyam scam; it was a case of gross misrepresentation and manipulation of account books. Clearly in the wake of RCIL and Satyam, Indian companies have their work cut out. Companies should look at the long-term prospects rather than laying emphasis on posting of profits and creating non-existent shareholder value by fraudulent means like window dressing. The impact of such scandals is huge as it increases the risk premium of Indian companies while raising questions over their credit worthiness. In Satyam, the fraud was committed by the Chairman, raising concerns about corporate governance.