The recent debate around the proposal by Satyam Computer Services Ltd to acquire a stake in a company related to its promoters has called into question the role of independent directors on the board.
Shareholders, who rely on the presence of such directors to provide the balance against transgressions of governance must now be wondering whether there are other Satyam-like instances, which pass unnoticed.
Satyams’ independent directors included former Cabinet secretary T.R. Prasad, entrepreneur Vinod Dham, and Harvard professor Krishna Palepu and Indian School of Business dean M. Rammohan Rao, the last two, I have had the opportunity to be taught by (although not about governance).
By any yardstick, these are men of eminence and learning who should be independent. Yet this fiasco took place on their watch. One can well imagine the Securities and Exchange Board of India and the US Securities Exchange Commission wondering, if a board so exalted could not protect the interests of minority shareholders, whether there is hope for governance at all.
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There is hope though for better governance with relatively small changes in regulation.
For a start, the measure of independence, should be altered from how it is defined now.
Clause 49, of the Indian listing agreement deals with the role of independent directors and assumes, that not being related to a promoter or having a direct economic benefit from a company, makes a director independent. This definition ignores the reality, namely that even eminent persons, find their prestige enhanced by association with board membership and some having been CEOs earlier, are empathetic to management. The current regulatory dispensation focuses strongly, on what goes into making an independent director, but makes little effort to assess whether that person continues to remain independent, once he is on the board.
Making such an assessment, in the real world is a challenge given that the mere presence of a related party dealing is not in itself evidence of value eroding behaviour. There can be many situations in which a transaction may not appear to pass the “smell test” of governance, but may still benefit the shareholder.
If, Satyam had to pay only a tenth of the price recommended by the promoters, to buy the two Maytas companies, one could make a cogent case, that, despite there being no obvious synergy between the two businesses, the shareholders would have benefited from a good opportunistic investment, at an attractive price.
When faced with such grey situations, the appearance of opacity or inadequate due diligence can be avoided if shareholders had some way, to infer that directors have fulfilled their fiduciary duties.