A recent article in Economic times reveals that following the takeover of scam-hit firm Satyam by Tech Mahindra in 2010, Mahindras are now contemplating to sue the company's erstwhile independent directors to recover Rs 11 million paid as commission to non-executive directors during the financial year 2008-09. Each of Satyam's former independent directors were paid a commission of Rs 12 lakh over and above sitting fees for the financial year 2008-09.
The independent directors of Satyam included renowned people like management guru Krishna G Palepu, Pentium chip innovator Vinod Dham, former Indian School of Business dean Prof Mendu Rammohan Rao, former cabinet secretary TR Prasad, former IIT Delhi director V S Raju and US-based academician Mangalam Srinivasan. It is ironical to note that in the presence of such eminent independent directors, the company’s founder Ramalinga Raju could manage to fudge the company's accounts for several years. This brings into question the role of the board, independence of the so called independent directors and the equation that they share with the company’s management and other stakeholders.
The corporate governance systems in different countries vary depending upon the legal set up, social and cultural values, and the structure of capital markets. The shareholder centric model of corporate governance in US and UK was created based on common law, which associates an equal or even higher weight to past precedential court decisions on similar cases, as to the statutes passed by legislative bodies. In the Anglo Saxon model followed, a unitary board of executive and non executive directors serves as the controlling mechanism to ensure that management act in the interest of shareholders of publicly traded corporations and pass on the profits to them. The corporate environment in India is very similar to that in the UK, having been built from the legal foundations and legacies of the UK. India is pre-eminently a common law country with a well developed system of law and justice. Similar to the UK and the US, the Indian regulations focus on the role of the board as the bridge between owners and management.
Taking into account the existence of concentrated and controlling shareholders in India, the amended Clause 49 of SEBI guidelines seeks to moderate this particular influence by the presence of majority of independent directors. Clause 49 requires that at least half of the board directors should be independent in companies where chairman is an executive and one third of the board directors should be independent in companies where chairman is a non- executive. Why is it that in spite of majority of independent directors, the Satyam boards of directors acted as silent spectators and were largely ineffective in monitoring the actions of management? To some extent to this behaviour can be attributed to the process through which the directors come on the board. The directors are generally brought in by the promoters and management; therefore they could look upon themselves as having responsibility to the promoters rather than to the outside shareholders. As a result, the boards of directors may remain passive or largely function as mouth- speak of the management.
In India, family run companies continue to dominate the corporate landscape. In most family controlled businesses, the managerial control of the business is often in the hands of the members of the family, who either own the majority stake, or maintain control through the aid of other block holders like financial institutions. The interests of the promoters, who are the majority shareholders, need not coincide with those of the other minority shareholders. This can lead to expropriation of minority shareholder value through actions like “tunneling” of corporate gains or funds to other corporate entities within the group. Under such circumstances, the directors who are friends and allies of the promoters may opt to confess incompetence and ignorance rather than to disturb the family based governance structures of Indian companies. When Dr Rao, the dean of the prestigious BSchool resigned from Satyam board, he was reported to have acknowledged of having no prior knowledge of the scam and was said to be stunned by the revelations of Ramalinga Raju.
Such instances of failure in corporate governance highlight the need for more changes to the existing systems. While the corporate governance framework established in India is robust and in principle as effective as those of the UK and US, the effectiveness of enforcement of the framework still remains an interesting empirical question.
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