About three months before the fiasco, Satyam management had bagged the Golden Peacock Global Award for excellence in corporate governance. Now it is in the line of fire over one of the worst cases of corporate governance, marked by conflict of interest and lack of transparency. Even more ironical is the presence of ‘independent’ directors on Satyam’s board. Two of them are from leading B-schools. One of them is also supposed to be an authority on corporate governance.

If Satyam’s board was convinced about the merits of acquiring Maytas Properties and Maytas Infra, then good corporate governance demanded that it should have taken into confidence at least the major shareholders, more so because it meant $1.6 billion to be transferred from Satyam to companies promoted by chairman B. Ramalinga Raju’ family. That the decision to buy these companies was not good has been established by the reaction of its key stakeholders and the precipitous drop in its share price. Although the board quickly aborted the acquisition plan, small investors in Satyam have incurred great financial loss. More importantly the company has lost the trust of investors and its image has taken a severe beating.

Now the big question arises about the role of independent directors who are supposed to protect the interests of investors, especially minority shareholders. One of them, Mendu Rammohan Rao, who is the dean of the Indian School of Business and former director of the Indian Institute of Management-Bangalore, is believed to have chaired the board meeting that cleared the way for Raju to buy the companies promoted by his family using Satyam’s money. The other director, Krishna G. Palepu, who belongs to Harvard Business School, has been too closely associated with Raju to qualify him for an independent director’s post. He has been Raju’s adviser for over a decade and was also actively associated with the Satyam Learning Centre in Hyderabad.

Also ReadPremchan Palety’s earlier columns

Palepu should have recused himself from taking the responsibility on grounds of conflict of interest.

If even one of the ‘independent’ directors really cared about the interests of the majority of shareholders, the resolution to buy Maytas Properties and Maytas Infra wouldn’t have been passed in the manner it was. Palepu and Rao should have shown their leadership skills in influencing Raju to follow a better governance model . If Raju thought otherwise, as a last resort, they should have resigned from the board. Unfortunately they did nothing of the sort and have lowered their image and also the image of the institutions they represent. Even more disturbing is the way they have been avoiding the press. Why don’t they speak out? Why don’t they disclose who did the valuation of Maytas Properties and Maytas Infra?

The following is an excerpt from Palepu’s bio data on the Harvard Business School website:

“Krishna G. Palepu is the Ross Graham Walker Professor of Business Administration and Senior Associate Dean for International Development, at the Harvard Business School. Professor Palepu’s current research and teaching activities focus on strategy and governance.

Professor Palepu has published numerous academic and practitioner-oriented articles and case studies on these issues. In the area of corporate governance, Professor Palepu’s work focuses on how to make corporate boards more effective, and on improving corporate disclosure. Professor Palepu teaches these topics in several HBS executive education programmes aimed at members of corporate boards: Making Corporate Boards More Effective, Audit Committees in a New Era of Governance. He also co-led Harvard Business School’s Corporate Governance, Leadership, and Values initiative, launched in response to the recent wave of corporate scandals and governance failures."

Is it so difficult to practice what you preach, Professor Palepu?

The past few months have witnessed many scams in the corporate world; most of them have been a result of bad governance and unethical practices. This should be taken as a challenge by our top B-schools, which should come up with solutions. But before preaching to others, they need to demonstrate ethical behaviour.

The best way to inculcate ethics among students is to have a culture of ethics in the institutions, with faculty members as role models. Rao and Palepu have set a bad example by their conduct in the Satyam-Maytas case. They need to own up responsibility.

Premchand Palety is director of Centre for Forecasting and Research (C-fore) in New Delhi, from where he keeps a close eye on India’s business schools. Comments are welcome at businesscase@livemint.com