The Hindu Business Line : Window-dressed boards

In his Power Point presentation at the Nasscom leadership summit in February 2007 a professor of management from an Ivy League business school quoted from a McKinsey survey of 854 independent directors in the US in which just 52 per cent of the respondents felt satisfied with their access to strategic information.

At the Satyam board of directors meeting on December 16 to discuss the acquisition of the two Maytas firms, one of the independent directors expressed the matter somewhat differently by suggesting that the board members be involved “right from the outset in the process (Maytas acquisitions presumably) to avoid the impression that the board was being used as a “rubber stamp.”

At the Nasscom presentation, the Ross Graham Walker Professor of Business Administration, addressing global and Indian CEOs and other experts, listed some of a board’s key functions after defining its role thus: “(To) Protect the long-term interests of the corporation and external investors”. The distinguished speaker listed two functions that merit special attention: “Oversight of strategy” and “Oversight of financial reporting and legal compliance.”

At the December meeting of the former Satyam board, Krishna G. Palepu, Professor at Harvard Business School, outlined a crucial strategic problem: the “proposed acquisitions have two complicated aspects —unrelated diversification and related party transactions.”

Indeed this issue was raised in different ways by two other independent members; Mr Vinod Dham who could be expected to ask that query given the nature of his achievements and business suggested that a transaction between related parties makes it imperative for the company to demonstrate “how the acquisition would benefit the shareholders”; Prof. Rao, chairing the meeting and the then Dean of the Indian Business School, asked a bit more bluntly whether this “unrelated business acquisition” would not amount to “dilution of core competency in IT business…”.

One other key independent director, Prof. Mangalam Srinivasan, of the University of California at Berkeley, had already expressed her fears that the members were being steamrolled into submission.

If the minutes of the meeting available on the The Hindu website are any indication, indeed they were. Prof. Rao finally agreed: “the transaction would add value to Satyam…” Prof. Palepu was assured by the management that his concerns had been addressed and he submitted, hoping the management would make the “same compelling presentation” to investors and analysts as it had done to them. Prof. Mangalam Srinivasan too acquiesced, “this is encouraging good news” though she stayed miffed at the thought of being used as a “rubber stamp”. The other directors had discussed valuation issues and the meeting resolved that the Satyam management could indeed go right ahead with that “unrelated” acquisition.

A model board?

Reading these minutes one could almost believe the popular perception that the Satyam promoters and their top henchmen had hoodwinked the board members, some of whom at least had asked the right questions.

The problem is that they were satisfied with the wrong answers; for instance, the argument that infrastructure (through Satyam’s huge investments in Maytas) would enhance the core competence of the parent company seemed atrociously at odds with the justification for moving into the “new space”, namely the gloomy outlook for IT business over the next two years.

While the independent directors seemed satisfied, some less so, none questioned the response of the management to a very fundamental issue of corporate democracy raised casually by Prof. Rao. It is instructive to quote from the minutes: “Prof. Rao then enquired whether shareholder’s approval is required for these transactions. It was mentioned that in this case it was not required.”

The very next day Mr Raju went public with his plans of pumping $1.6 billion into the two Maytas firms. Had the board members been following the developments they would have heard the rumbling as shareholders provided the right answer to Prof. Rao’s question. The share price plunged and investors rose in arms and Mr Raju backed off, “surprised…” Evidently he thought the shareholders at least the institutional ones would be as cooperative as the board had been.

Within a few days, the longest serving independent member of the board, her suspicions probably confirmed, resigned owning moral responsibility. Prof. Mangalam Srinivasan may have been candid enough to admit a lapse but the others waited; in fact Mr TR Prasad, former Cabinet Secretary, continued to assert the genuineness of the move on Maytas till Mr Raju’s confession of fraud probably convinced him otherwise.

While they were sleeping

The minutes of the Satyam board meeting, like those of almost every board, presented a sanitised view of the discussions — or non-discussions — that transpired.

They are highlighters not transcriptions of the discussions; but they do give us a sense of the preoccupations of the independent directors, their degree of intellectual separation from the pat responses, some self-contradictory and, in one case, an outright lie.

Some of the independent directors, in hindsight, raised the most pertinent question about diversification into unrelated business of related parties, a phrasing that summed up the manner in which the Satyam management was hijacking the company. Yet all concurred, apparently content at the answers from senior executives clearly in the know of what Mr Ramalinga Raju’s real intentions were.

Corporate governance experts may debate endlessly and directors themselves, in self-righteous anger, may wonder just how they are supposed to question every statistic placed before them by professional auditors and legal experts; but who will explain why a brazenly false answer in reply to Prof. Rammohan Rao’s query about shareholder approval before the deal was accepted so docilely?

Courage to say ‘no’

The Satyam mess is an expensive reminder of how much corporate governance still remains an ideal. Five independent directors, of whom three could be expected to probe more keenly, distanced as they were from the company by geography, cultural training and vocation, were beguiled enough to welcome what shareholders less than 48 hours later would reject unanimously.

In all the discussions about the authenticity of auditors, company secretaries and chief financial officers little attention seems to have been paid to the board’s efficacy as a structure of governance. With so much attention devoted to the machinations of the promoters and the chief executives, the directors have emerged the victims, a perception endorsed by the flight of independent directors from several companies.

In the days to come, endless debates will rage on ways to make boards more effective or less pressured by financial manipulation. But at the end of the day some elementary qualities of oversight, not necessarily found in academic tomes but located in the universal credo to fulfil a responsibility vested upon one will continue as the basis for the key functions of an independent director.

And what are they? Writing in The Hindu (January 30, on op-ed page), Aparna Ravi got down to it, stripped of all business-school fluff: “At the end of the day, the only form of independence that independent directors exercise is that of judgment. In practical terms this involves keeping their eyes and ears open at board meetings, reviewing materials provided to them and asking questions when things smell wrong or simply don’t make sense…” She could have added “and the courage to say no.”

( blfeedback@thehindu.co.in)

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Truly independent directors, a rarity
‘Satyam’s independent directors had raised concerns over the deal’
Satyam episode brings corporate governance issues to the fore
Whither corporate governance?

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