The Hindu Business Line : L’affaire Satyam

Maytas is a palindrome for Satyam. It has now turned out to be a syndrome for India’s corporate governance. The Satyam Computer affair is a corporate board’s attack on Indian investors, not very different from the terror attack on Mumbai in November: Brazen in intent and devastating in outcome. In the process, it has demolished a number of pet theories that seminar-trotting governance experts embrace the same way Linus van Pelt clings to her security blanket i n the Peanuts comic strip.

Satyam is in a highly competitive business with overseas clientele. The company’s board has an unusually large number of independent directors — six out of nine. The board includes a well-known professor of accounting at Harvard Business School; the dean of the Indian School of Business; the “Father of the Pentium”; a Scientific Adviser to the Government of India when Indira Gandhi was the Prime Minister.

Listed on the NYSE, the company is audited by PricewaterhouseCoopers, a big four accounting firm. It is among the region’s top two companies for “Best Corporate Governance Practices”. It claims “delighting stakeholder” is a part of everything that the management does. So why did it happen?

Glorified family enterprise

The trouble with imported governance codes is that they ignore India’s social reality. In a sense, they are like Ferrari — top-class, but not designed for our pot-holed roads. Over several millennia, Indian parents have believed that their first duty is to their children. Of course, protecting dharma is one’s foremost duty.

In practice, children ranked ahead of dharma. (For proof, read the Mahabharata.) The idea of separation of ownership and management that is an essential feature of the corporate form of organisation has never seriously appealed to Indian businessmen.

The Indian listed company has been, for the most part, a glorified family enterprise that tolerated outside investors at best and looted them in the worst case. Companies such as Infosys are rare exceptions to this rule. Where do we go from here?

First, we should give up the pretence that Indian companies are managed professionally. Being managed by professionals does not mean professional management. Indian investors should accept that they are dealing with owner-managers whose objective need not be shareholder value maximisation.

Second, investors must raise the required rate of return for their equity and debt by adding a governance risk premium. Given that the number of well-governed companies in India is small and that it is impossible to find out whether the management is trustworthy, this premium will have to be steep. This is the only way to discourage individuals with bad faith from raising capital.

Of course, it could lead to a market breakdown, as the lemons principle tells us. Good managers will have to identify themselves by signalling. What better signal than returning surplus cash to the shareholders to whom it rightfully belongs? Indian shareholders have been criticised for their dividend addiction, but it now seems that the addiction has been for their good.

Third, foreign investors should be prepared to play the watchdog role. Let us not forget that it is Satyam’s foreign investors who forced the management to back down from its audacious attempt.

Finally, the entire Saytam board should quit. Being wrong is bad, but being unapologetic is a crime. Letting the investors have a new board and a new top management team would be the best way to ‘delight’ the company’s stakeholders.

If a company’s management catches an employee red-handed, the employee is typically asked to leave. The principle that underlies that action ought to apply to Satyam’s top management. By the way, the word satyam means truth in Sanskrit. Any takers?

(The author is Professor, Finance and Control Area, Indian Institute of Management, Bangalore. The views are personal. blfeedback@thehindu.co.in)

Related Stories:
Satyam to buy Maytas Infra, Maytas Properties for $1.6 b
Satyam backtracks, says it misread the possible impact
Maytas deal raises more questions: Ministry
Hurrah for shareholder activism!
Whither corporate governance?
‘Satyam’s independent directors had raised concerns over the deal’
Satyam plans buyback; board meet on Dec 29

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