Vikalpa: The Journal for Decision Makers

This is a comparative study of Enron and Satyam corporate frauds. An attempt has been made to arrive at some generalizations about the key reasons for the differences between agency and tunneling problems. Agency effect and tunneling phenomena focus on the divergence in the interests of managers, promoters, and minority shareholders, which are the key reasons for corporate fraud. There is a clear difference between the fraud committed due to tunneling and agency effect. The article highlights this feature through the case study of Enron and Satyam. The difference between tunneling and agency effect has important implications for corporate finance. Corporate finance is based on the assumptions of separation of ownership and management and also perpectual continuity of corporation. If these two assumptions are dropped, then many of the widely accepted theories may not hold.

The article concludes that the legal framework, nature of financial system, and level of economic development are the key factors which determine the level of agency effect and tunneling problem. Solutions to corporate governance problems are quite different in India as compared to the US or Europe. Hence, it would be inappropriate to copy American legislations like Sarbanes Oxley Act in India. Effective prevention of destructive self-dealing activities is necessary for development of vibrant capital market, whereby small investors will be confident to invest in the Indian market, since they will perceive risk premium to be low.

The key policy prescriptions are as follows:

Effective delivery of justice is as important as enacting investor-friendly laws.

Creation of subsidiary companies by the parent company and large financial transactions with banks should be viewed with suspicion. On the part of the shareholders, they should be suspicious of any self-dealing transactions. Since the time of Harshad Mehta, when stock brokers, promoters of the company, and bankers connived to cheat small investors, enforcement agencies view even large banking transactions with suspicion.

Small investors and institutional investors should play a proactive role to seek information and reject any decisions which reduce their value of shares. Proactive participation of outside shareholders in the corporate affairs of the company, especially in the selection of board of directors and approval of resolutions, are the key remedies to prevent such cases.

There should be an effective control of black money.

Certain clues like promoters setting up too many subsidiaries, frequent changes and resignations in board of directors, consistent decrease in promoter stake or increasing liquidation of equity options, are clear signs of fraud taking place. Regulatory authorities should work on such clues and operate in such a way that there is least chance of regulatory arbitrage.

In an ideal Knowledge Management environment in an organization, two objectives need to be achieved. Firstly, knowledge workers should have customized informational support for their respective works and secondly, workers across the organization should be able to easily understand and utilize information produced from myriads of knowledge works. Unfortunately, in current KM research and practices, these two goals are rarely addressed together. In fact, most of the KM practices subscribe either to the task-based KM approaches or to the generic/universalistic KM approaches. Typically, each of them is either unable to cater to the need of the other category or provide some ad hoc measures.

This paper examines the major issues from a very basic level to understand the problems and attempts to present a solution that systematically covers both the objectives of KM. In the process, it develops a theory, the Task-oriented Organizational Knowledge Management (TOKM), within which the problems are analysed and a viable solution is identified. TOKM gives us a set of design principles for building a new class of IT-based support systems which can serve as a major component of organizational KM.

TOKM focuses on information usage in knowledge works and the scope of technology intervention in the related processes. In this paper, the Task-oriented Organizational Knowledge Management is presented as an Information System Design Theory (ISDT) for building integrated IT platforms for supporting organizational KM. In developing the design, the information requirements of knowledge workers in light of an information usage model of knowledge works is studied. Then the model is extended to study possibilities of more advanced IT support and formulate them in the form of a set of meta-requirements. Following the IS design theory paradigm, a set of artifacts are hypothesized to meet the requirements. Finally, a design method, as a possible approach of building an IT-based integrated platform, the Knowledge-work Support Platform (KwSP), is outlined to realize the artifacts in order to meet the requirements.

KwSP is a powerful platform for building and maintaining a number of task-type specific Knowledge-work Support Systems (KwSS) on a common sharable platform. Each KwSS, for the task-type supported by it, can be easily designed to provide extensive and sophisticated support to individual as well as group of knowledge workers in performing their respective knowledge work instances.

Poor performance has become a regular feature of the state-owned manufacturing enterprises in spite of their having experienced workforce, old brand reputation, etc. Most of them have fallen into a vicious cycle due to their prolonged poor performance.

The problem starts with the poor working capital position, leading to high raw material cost and uncompetitive final product pricing. This leads to the generation of a very low investible surplus. Not having investible surplus has forced the state-owned manufacturing companies to a financial situation where they are facing severe dearth of capital. The age-old plant and machineries coupled with outdated technology used for production face severe problem under the dearth of capital condition and the manufacturing units become incapable of generating sufficient investible surplus. Lack of modernization of machinery and upgradation of people skills lead to constraints in producing value-added product which have both market demand as well as the potential for greater contribution than the regular product. Therefore, the manufacturing companies continue to perform poorly, without any product-mix diversification. The poor operational performance also gets reflected in their financial performance. Despite having positive contribution at operating margin before direct labour, most of the state-owned manufacturing companies are incurring losses at Earning Before Interest, Tax, Depreciation and Amortisation (EBITDA) level, even under the best-case scenario, mainly because of huge amount of employee cost.

This paper suggests two solutions for these manufacturing companies — restructuring and disinvestments. The financial restructuring of the state-owned enterprises has become a unique programme in the country having the following key features:

Broad political consensus has been arrived at on the financial restructuring programme.

Unique and extensive stakeholder consultation process has been adopted to facilitate buy-in of staff associations and unions on restructuring proposals

Innovative framework and principles have been established for:

categorization of enterprises

early retirement scheme for employees

Social Safety Net programme

financial restructuring

transparent and competitive bidding process with in-built safeguard

A Public Enterprises Cell has been created for guiding the restructuring efforts.

Impact of government's budgetary resources is seen in reduction of the State loan exposure to the tune of around Rs.344 crore, primarily through conversion of loans to equity.

Impact on performance of enterprises identified for restructuring is reflected in the reduction in aggregate net loss to the tune of around Rs. 67.5 crore.

Further improvement of the state-owned enterprises has been recommended based on the lessons learnt during the process of financial restructuring. It is believed that opportunities do exist for widening the scope of the programme.