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.
All directors have a primary duty of loyalty to the shareholders who appoint them. In the public form of corporation as it exists today, most of the voting power remains with large institutional shareholders. As a fiduciary, independent directors should have the opportunity to meet with institutional investors to understand their views. How, after all does a director satisfy the demands of his role if he is unaware of the views of his shareholders?
Although current regulations, correctly, would not permit the sharing of information between directors and select groups of shareholders, it does not, as far as I know, prevent shareholders from meeting directors and expressing their views on the companies strategy. It would certainly elevate the level of participatory governance if independent directors could get a more direct sense of how major shareholders feel about strategic issues, through meetings with groups of shareholders.
In Satyam’s case, directors may have voted differently if they knew perhaps through such meetings the views of shareholders on the issue of unrelated diversification of the kind proposed by the promoters.
Shareholders on their part, have a right to know how their directors represent them. Details of dissenting views, in a board can convey useful information about the various options considered at a meeting. While detailed views cannot usually be disclosed in the short term, it is possible to have minutes publicized after two-three years. This will not serve the immediate purpose of protecting present shareholders, but would impose pressure on independent directors to be seen to be fulfilling their duty of loyalty.
Moreover, important judicial rulings, especially those of justices Bradley and Fuller of the US supreme court ( Railroad Co v Lockwood, 1873) have concluded the need for directors to also demonstrate due care and skill as the situation demands. This duty of care, enshrined in law, would have required Satyam’s directors to undertake an assessment of the benefits of the transaction, question the valuation method and examine alternate uses for the cash in the company, before approving the Maytas transaction.
There is little evidence in the public domain available to shareholders to show if this was done. One way to know, if diligence was exercised at the board is to know how independent directors voted on such issues, perhaps through a statement in the annual report. It would call in to question, the real independence in a board, if persons of widely varying backgrounds were to always seem to agree, on every issue. By resigning instead of coming up with an explanation for what transpired at the board, some of the directors of Satyam, beg the question whether any meaningful debate took place at all, on this issue.
It is not difficult for the regulators to bring the sunlight of transparency to board discussions, through a few changes in their disclosure guidelines as I have suggested above.
Ironically, a few months ago, Satyam won an award for good corporate governance. Rather than this kind of “check the box” approach to governance, which as in the case of Satyam, meant little, good boards need to be rooted in the culture of an equal relationship between the independent directors and the CEO.
Consultancy firm AT Kearney, in a 2004 survey on how boards should work, discarded prescriptive criteria such as the separation of the roles of chairman and CEO or the creation of a process to evaluate the board, for measuring board integrity and instead suggested that truly independent boards need to be able to shape agendas, (not be given agendas by the management) and be able to establish an inquisitive culture of enquiry pushing back at the management all the time.
And, finally, the board as a whole needs to be in a position to bring about succession, if unhappy with the management. Only if the board has the Brahmastra to effect a change of the CEO, can it really be said to have teeth.
In the case of Satyam though, at the time of writing, CEO B. Ramalinga Raju remains, the independent directors have quit. Food for thought.
Govind Sankaranarayanan is CFO, Tata Capital Ltd and writes on issues related to governance.The views expressed in this column are personal. Respond to this column at firstname.lastname@example.org