The Hindu Business Line : Showcase capitalism

The erstwhile Satyam board was a role model for capitalism; yet it failed to prevent the promoters from treating the company like a personal fiefdom, says ASHOAK UPADHYAY.

In better times.

In an interview with this paper a day before he was picked by the government for the reconstituted board of Satyam Computers, the HDFC Chairman, Mr Deepak Parekh, had this to say about the erstwhile independent directors of the hobbled company: “For an independent director who is not employed full-time by the company, it is very difficult to find out everything.”

Elaborating on the subject, he cited the case of a chartered accountant and the need for severe penalties for such professionals making or, presumably, abetting a false statement.

By implication, it is only the full-time professional who has the capacity to discover any “creative accounting” — that misplaced euphemism for financial malfeasance. That is more or less the viewpoint of the erstwhile independent directors who cared to air their “shock and dismay”.

Welcoming the government takeover, Mr T. R. Prasad, one of the former directors, told this paper he had “no inkling” of the mess the promoters had created and, like Prof V. S. Raju, another former board member, welcomed government intervention.

Articles of faith

The sense of outrage and dismay runs like a thick seam through the resignations that followed Mr Ramalinga Raju’s confession of doctoring the company’s fortunes for five years. But only Prof Mangalam Srinivasan, on the board since 1991, resigned before the confession and immediately after the Maytas move had been aborted by institutional investors, owning moral responsibility for what was viewed as an action in bad faith.

With the minutes of the controversial board meeting on Maytas, held on December 16 now published in part by this paper, it is possible to get a sense of how the independent directors reacted to the proposal of the chairman to acquire Maytas Properties and Maytas Infra for $1.5 billion. According to the published reports, “Mangalam Srinivasan appears angry at the board being given a fait accompli on the Maytas acquisition and the prospect of being viewed as ‘a rubber stamp’”. Prof Mendu Rammohan Rao, who subsequently resigned from the board and from his position as Dean, Indian School of Business, thought that the valuation of the two companies being acquired needed to be approved by the shareholders; the management told him that was not necessary.

Mr T. R. Prasad felt the valuation for Maytas Properties needed an upward revision. But it was Professor Krishna Palepu who got to the heart of the matter by raising the fundamental issue of acquisitions of unrelated diversification and related party transactions a matter he felt was of concern to investors and analysts.

Clubby boardroom

He was right, of course, because the institutional investors howled in protest, the markets thumbed the scrip down and the promoters found their share of the company falling drastically from 8 per cent as institutional debtors sold their holdings. Only Prof Srinivasan publicly owned up moral responsibility. But for what? The promoters going ahead without the full concurrence of the board or for the dismay at being proved right by those who had no prior knowledge of the unrelated business diversification to which she had become, in her own words, “a rubber stamp”? Or for both?

And what of the others who kept silent, or continued to support the idea of the acquisition — till Mr Raju told the nation of riding a tiger for fear of getting off and being eaten? Barring two, the rest resigned in shock and anger. But why should they have felt that way? They had raised doubts, one way or another, about the Maytas deal.

As professionals with years of experience in their respective fields, some with global connections and richly deserved fame for the contribution to the body of knowledge in their fields of specialisation, surely they must have had some inkling that not everything was right with the way the company dealt with the world.

That the Maytas deal was not proper till ratified by an EGM. That Satyam had had problems of a major sort like the Upaid issue and the legal wrangle in the British courts. Or that the World Bank had raised suspicions with the US Justice Department about Satyam already last September.

Two board members are luminaries in the business administration departments of Ivy League universities, one is an inventor-businessman in America; all had access to information required to gauge the moral competence of the promoters in their dealings with high-value customers, a matter of strategic interest for the board of the fourth largest IT Indian company.

A Who’s Who

On the Satyam Web site, the histories of the erstwhile board members, apart from the promoters’ biographies, read like a Who’s Who of Competence and Distinguished Service. These were not showy names that some boards stuff the top floor with; no government appointees or social activist types that lend the company an air of social relevance.

But for what were they paid? The Satyam board was a model of corporate governance. The majority were independent directors, experts who would have brought all their skill and learning and wisdom to bear on the fortunes of the company. In 2005, the Harvard Business School’s “Working Knowledge” (November 24) carried the summary of a piece of research by Prof Robert S. Kaplan on what came to be called the “Balanced Scorecard Approach” to corporate excellence. This was a tool to be used for measuring performance at the business, corporate and board levels.

According to Kaplan and his co-author the Board’s “key functions are overseeing a company’s strategy and leadership, monitoring its financial results and overseeing compliance with regulations.”

Last February, at the Nasscom Leadership Summit in Mumbai, Prof Kaplan’s co-author and colleague at Harvard addressed a glittering array of world leaders from the IT space and academicians on corporate governance.

His Power Point presentation identified “Potential issues for corporate governance; protecting long-term interest of the investors; performance monitoring and compensation; and oversight of financial reporting and legal compliance.” The speaker? Prof Krishna Palepu, Ross Graham Walker Professor of Business Administration at Harvard Business School.

With this five-star board, how could Satyam’s promoters get away with what they did for five long years? Or, to turn the question around, what were the members paid for? In hindsight they were paid for their brand names, for the glamour and goodwill their association brought to the company in a world of fiercely competitive inventor-entrepreneurs of the most developed market of the world.

When Satyam imploded, most board members responded like ordinary investors —with shock and dismay at having been, well, cheated. A distinguished body of people with great skills and competence was as unable as the ordinary investor to discover, or prevent, for twenty quarters a promoter and his close confidantes from treating a publicly listed company like their personal fiefdom. In hindsight, they fell prey to the most common and ancient human trait — the need to conform.

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