FINANCIAL SCENE
Corporate governance at its nadir
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The Satyam debacle has had international ramifications; its shares are quoted in New York and there have been class action suits
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Corporate governance depends on all parts of the system — the board, independent directors, auditors and others working together.
— FILE PHOTO
Satyam Computer Services’ head office in Hyderabad.
In the aftermath of the Satyam Computer Services debacle, practically every commentator has pointed a finger at the failure of corporate governance standards at a company that has been India’s fourth largest exporter of information technology (IT) services and a winner of an award on corporate governance to boot.
From now on awards such as the one on corporate governance, best business person of the year and so on will have very little value even in the narrow context of enhancing a company or its principal officer’s brand value.
The fact is that until Ramalinga Raju, the erstwhile chairman of Satyam Computer Services, disclosed the big hole of over Rs. 7,000 crore in the company’s balance sheet, everything seemed hunky dory.
True, its image was dented after the abortive takeover bid of the two Maytas infrastructure companies owned and controlled by the family members of Ramalinga Raju. That was — in the light of subsequent developments — a minor blip that the company could have taken in its stride. However, even then there were concerns over the levels of corporate governance where the nominally independent directors were merely rubber stamping the promoters’ dubious plans?
Actually, as Mr. Raju were to explain later, if Satyam had bought over the two infrastructure companies, it might have been able to show ‘real assets’ in its balance sheet.
Desparate act
Although no one knew it then, the Rajus were playing with particularly high stakes when they tried to bring about a forced merger of Maytas companies with Satyam. Again, with the benefit of hindsight one might say that it was an act of desperation.
After admitting to a systematic fudging of books over seven years, it was time to go for an all or nothing deal. In Raju’s case it failed bringing Satyam down with him.
That there was a failure of corporate governance is amply evident.
The Satyam debacle has had international ramifications: its shares are quoted in New York. There have been class action suits already.
Just as important, in the early days after the debacle, stock markets around the world declined.
In India, markets were looking up until Mr. Raju’s revelation.
The temptation to tarnish the whole of corporate India with poor governance is strong but it will be wrong. There are many companies which have been adhering to the internationally comparable governance norms set out for them. India does have an elaborate corporate governance structure in place.
The confession
Both the Companies Act as well as the listing agreements that public limited companies enter into with stock exchanges contain important provisions.
Company law lays down the principles of corporate governance that they have to follow.
Accounting standards
Among others, it calls upon the company’s board to adopt the accounting standards as stipulated by the Institute of Chartered Accountants of India (ICAI), a duty to maintain proper books of accounts, prepare final statements that conform to acceptable standards, to exercise due diligence before signing the report.
Some of the above stipulations have obviously not been followed in the case of Satyam.
What would normally have been considered serious, but technical transgressions have become the ingredients of a major scandal after Mr. Raju’s confession.
The erstwhile independent directors of Satyam might have resigned but their alleged sins of omission and commission relating to the misstatement of the company’s accounts will haunt them for a long time.
More basic and comprehensive rules on governance are laid down under Clause 49 of the listing agreement that all publicly listed companies will have to enter into with stock exchanges where their shares are, or will be, traded. For instance, companies going public for the first time will have to comply before it files the draft (Red Herring) prospectus with the Securities and Exchange Board of India (SEBI) and simultaneous to its request to the stock exchange concerned for an in principle permission to trade in its shares.
The board of a listed company will have a combination of executive and non-executive directors. Not less than 50 per cent of the board should comprise non-executive directors.
Among other requirements of Clause 49 is the duty of a company to identify and appoint independent directors and the number of seats they should occupy in the board. (The proportion depends upon whether the chairman is an executive or non-executive director. If the chairman is an executive director 50 per cent of the board shall be independent directors; if non-executive it will suffice if independent directors form one third of the board.)
The independent director should be a non-executive director and inter-alia not be a substantial shareholder not related to the promoters not been an executive of the company in the preceding three years apart from receiving director’s remuneration does not have any material pecuniary relationship or transactions with the company or its promoters or with senior management.
Also under Clause 49, the board of directors of all listed companies should lay down a code of conduct for all its members and senior managers and these members should affirm their compliance on an annual basis. Finally, the board should constitute a qualified and independent audit committee, a shareholders’ grievance committee and a remuneration committee.
Mr. Ramalinga Raju’s predicament has occurred despite Satyam observing all the norms of governance. Evidently it is not rules alone that matter but their implementation.
In Satyam’s case the independent directors failed in their duty, the auditors have blundered, all internal and external checks and balances went haywire and the regulatory authorities, the SEBI, the stock exchanges and the company law administration have been lax. If one or a few promoters could get away with such a massive fudge for more than seven years, it does not speak well of governance in practice.
C. R. L. NARASIMHAN
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