Tuesday, May 12, 2009

Corporate Governance ..

Satyam scandal has unnerved lot of market participants about the chances of corrupt practices being undergoing in lot of other companies, people who use to believe in fundamental analysis of the securities are now suspicious of the real intrinsic value of their stock holdings. Clearly discounted cash flow analysis , relative valuation or even DDM cannot account for the risk of marked up employees or fudged balanced sheets. In such a scenario what method of valuation can actually discount for the risk of abysmal corporate governance is a real issue for modern day finance practitioners and there is a need to add this qualitative measure in quantifying the intrinsic value of any stock. This risk can be called risk of asymmetric information .One of the way of quantifying such risks is increasing the discount rate for company with less transparency or lesser number of independent directors. The high discount rate will reduce the value of the stock but quantifying the value of this premium is a very difficult process.

SEBI is coming out with a new formula to add another check in the auditing process by introducing peer review. In a peer review internal auditors from some randomly selected company will check the books of some other company and vice verse.  There may be lot of operational intricacies in actually adopting this process but it can act like a good deterrent for the company to take up innovative accounting practices . What is interesting is that the industry is not supporting this new check. Let’s hope we have it implemented and it can identify most of the Satyam’s in the process.  

No comments: