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The Satyam fiasco has brought into spotlight three important areas of corporate culture: Corporate governance; the role of independent directors, and investor activism.
Sometimes, rather unfortunately, it takes a negative turn of events to bring out the positive. The recent Satyam fiasco that saw the promoters of one of India’s leading IT companies to come under fire from shareholders, has brought into spotlight three important areas of corporate culture: Corporate governance; the role of independent directors, and investor activism.

Corporate governance refers to an array of policies and processes that are aimed at making a company accountable to its shareholders. Trust is one of the salient features of the exercise that includes taking the stakeholders of the company into confidence at each step. Infosys is cited quite often as a shining example of best practices in corporate governance. In his book, Billions of Entrepreneurs, Prof Tarun Khanna of Harvard Business School makes passing reference to a case study on Infosys. It talks of how in the early 1990s, the software major made big money through public offerings and was awaiting the government nod to invest it in a US subsidiary. Some of its board members prodded the promoters to invest in the stock market rather than have the money sit in a bank account. But Infosys burnt its fingers in the financial market and lost “quite a bit of money” in the market.

The company was now faced with two choices: Either to face the investors and tell them the truth about the loss OR stay silent, as the law of the land did not seek disclosure in any form. “But Infoys decided to disclose the losses. The board was ready to face the wrath of the investors, and they figured they would be kicked out and replaced. But when the meeting came, the investors said ‘we respect what you have done. Because you have disclosed something when you are in trouble, we can trust you’. The real indicator of good corporate governance is how you respond in difficult times,” the case study points out. Such is the level of accountability that every shareholder has the right to expect from his investee company. The ruckus over the doomed Satyam-Maytas deal could see more companies line up at the doors of credit rating agencies for corporate governance ratings (CGR). While top credit rating agencies such as ICRA and Crisil had started offering CGR five years ago, only a handful of Indian companies have opted for them.

Are independent directors really “independent”? The Satyam fiasco has raised a big question about the role that independent directors are supposed to play vis-à-vis what they do in reality. Such directors on the Satyam board are now trying to come out clean on the beleaguered deal that got the nod of the board on which they sat. One of the directors, Mangalam Srinivasan, later resigned owning “moral responsibility” although she claimed that she made her reservations clear in the board meeting.

Many of the “independent” directors hop on to the board as a courtesy of the chairman or the CEO, whom they have known for a long time. In such cases, the directors are seen more as “friends” of majority shareholders, rather than as watchdogs on behalf of small investors. However, the spirit behind having such directors is to get an objective view of important decisions and the overall functioning of the company. Thanks to the Satyam controversy, I’m sure many of the independent directors would want to introspect to see how “free” they are when it comes to protecting the rights of small investors. The whole process of appointment of a director and appraisal and evaluation needs to be revisited to ensure that only the most competent make it to the boardrooms.

Investor activism is another focus area that is sure to get more importance now. Thanks to the activism shown by institutional investors that sit on the Satyam board that the deal had to be called off. This should give hope to even small investors, some of who gather courage at the Annual General Meetings (AGM) of companies to raise a dissenting voice. In the developed countries such activism is gaining momentum. In India we hope to see that taking off in a big way going forward.

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