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Scam may Change Cushy World of ‘Independent Directorship’

MUMBAI - IT has over the years developed into an incestuous relationship between the corporate world, bureaucracy, the world of academia, consultants and bankers. But the Satyam scandal is expected to change the cushy world of independent directorships.

Many listed Indian companies — like the now infamous Satyam Computers — accommodate former bureaucrats, top academicians and others who have been connected with it in the past and have now retired, as ‘independent directors’ on their boards. Most of the personages, however, toe the management line, endorsing every decision, without raising any objections.

India has been facing an acute shortage of independent directors, especially after the Securities and Exchange Board of India (SEBI), the capital market regulator, introduced tough new listing norms from April 1, 2005.

Clause 49 of SEBI’s listing norms, dealing with corporate governance, insists that a board – headed by an executive chairman – should have 50 per cent of independent directors; a board headed by a non-executive chairman should have at least a third of independent directors.

The lack of ‘independent directors’ saw many companies accommodate former bureaucrats and bankers, academicians and consultants, providing them with cushy, post-retirement sinecures. The Satyam board, for instance, included T.R. Prasad, the former cabinet secretary of India; two top academicians – Krishna G. Palepu, a Harvard University professor, and M. Rammohan Rao, the dean of the Indian School of Business, Hyderabad (who quit the prestigious institute after the Satyam scam); and two prominent, US-based Indians, Vinod Dham and Mangalam Srinivasan.

The Indian Ministry of Corporate Affairs dismissed the Satyam board on Friday night for its failure to prevent “the greed and misdeeds of a few persons who were at the helm of affairs” in the company.

All the ‘independent directors’ had timidly endorsed last month’s resolution moved by B. Ramalinga Raju, the disgraced promoter and former chairman — who was arrested in Hyderabad along with his younger brother on Friday night, days after confessing of a massive $1.5 billion scam in the firm – seeking the acquisition of two family firms of the promoters for $1.6 billion.

It was only after stock-markets in the US and India reacted furiously, hammering the Satyam scrip, that Raju was forced to withdraw the resolution.

Many of the independent directors are now expressing ‘shock’ over the manner in which Raju hoodwinked them, independent auditors and regulators. Prasad, for instance, claims that none of the independent directors were aware of the fraud at Satyam. “We had trusted the audited reports by PricewaterhouseCoopers,” says Prasad. “We did not see any reason so suspect that the books were manipulated.”

Before SEBI introduced tough listing norms, getting directorships on the board of Indian companies was a matter of patronage. There were several prominent personalities – retired bureaucrats, bankers, academicians and consultants – who would be on the boards of scores of companies, but without much accountability.

SEBI now insists that a director cannot be on the board of more than 15 listed companies. Many of them, however, find positions on the boards of dozens of unlisted companies as well. A director is supposed to attend a meeting once in three months, when quarterly results are to be approved. If a director is on the board of 15 listed companies, it means attending 60 meetings in a year – a little over one every week.

Independent directors are expected to take a critical look at many of the decisions by the management and thoroughly study proposals relating to billions of rupees of investment. Most of them are also members of committees, including key ones like the audit committee. Audit committee members can call for a review of audit reports, which could have prevented scams like the one involving Raju.

But considering the close links that the so called independent directors have had with the promoters, most are reluctant to raise objections or scrutinise the books of accounts.

Many analysts here admit it is virtually impossible for independent directors, present on the boards of several companies, to do justice to such demanding tasks.

According to Uday Kotak, managing director, Kotak Mahindra Bank, the Satyam episode signals “a collective failure” of third parties overseeing the functioning of a company. Independent directors are supposed to provide an independent oversight of the company, he adds.

· nithin@khaleejtimes.com