By now, readers of this magazine are aware of the
twists and turns of the Satyam saga. It’s like Akira
Kurosawa’s 1950 film, Rashomon, where a woodcutter
and a Shinto priest re-tell mutually contradictory
stories about a woman, her dead samurai husband and
a bandit as they wait out a rainstorm in a ruined
gatehouse — leaving the viewers to determine which,
if any, is the truth.
Did the promoter, B. Ramalinga Raju, and his
co-conspirators inflate Satyam’s books? Or was
Raju’s 7 January confession all smoke and mirrors to
hide siphoning of funds to finance property deals?
Was Price Waterhouse a negligent auditor? Or is it
being made the scapegoat? Did the internal auditors
capture serious deficiencies in financial reporting
processes or were they blinded as well? Was it a few
guys doing under-the-radar swindles for many years,
or some mega-ticket items over the last year or so?
Was the board sleeping on the watch, or did it get
comprehensively duped for no fault of its diligence?
Why did Raju confess? Like Rashomon, there are many
conflicting and mutually contradictory stories —
whose truth will out, if it does, only after
detailed investigations.
The purpose of this article is not to suggest yet
another explanation of what happened because,
frankly speaking, only Raju and his ilk know that in
its entirety. Instead, it is to suggest what we can
learn from Satyam regarding corporate governance,
and indicate some do’s and one major don’t.
Let me outline a few things that we must consider
very quickly. First, it is absolutely imperative
that if promoters, their families and associates
pledge any shares, this must declared to the board,
the stock exchanges and SEBI. Issues about an
individual’s right to confidentiality can be
overcome by declaring the pledge as a part of the
promoter group.
Second, no director belonging to the promoter group
or the management should be a member of a listed
company’s audit committee. Thus, the audit committee
of any listed company must consist exclusively of
independent directors — and not two-thirds as
currently prescribed by Clause 49 of the Listing
Agreement.
Third, we have to debate the need to separate the
role of the chairman of a company from that of a
CEO. This is not a black-or-white issue anywhere in
the world, and has much to do with extant customs
and procedures. For instance, the UK has much more
of this than the US. I am not suggesting one or the
other. But I am advocating the need for a more
intensive deliberation.
Fourth, it is necessary to realise that the present
ceiling on the number of directorships is too
generous, and can be inimical to good corporate
governance. At present, SEBI specifies that no
director can be a member of more than 10 committees
of the board or be a chairman of more than five such
committees. We need to review this. My sense is that
it in the post-Satyam era it will become
increasingly difficult for independent directors to
properly discharge their fiduciary responsibilities
if they serve on 10 boards or more. It is not for
law or regulation to prescribe the optimal number of
board positions that a person should accept. But it
can prescribe a ceiling. And 10 is more than enough.
Fifth, we also need to revisit a non-mandatory
provision of Clause 49 — namely, that independent
directors should step off boards after nine
successive years. There was a furore across
corporate India when the Narayana Murthy committee
suggested it, which made it a non-mandated
suggestion. We need a re-think. I believe it makes
sense, because a very long association with any
board can potentially diminish the objectivity and
watch-dog like behaviour that shareholders have the
right to expect from their independent directors. My
preference is to start with 2004, when the new
Clause 49 came into being; and count off nine years
from then. So, anyone who was an outside director on
the board of a company in 2004 ought to demit office
no later than 2013.
Sixth, we should re-examine the rotation of
statutory auditors — perhaps after six successive
years. Like independent directors, statutory
auditors should not have too long an innings with
any company. Six years is fair; it takes a year or
two to get well versed in the company’s business,
and four more to leverage that knowledge to produce
results. A related issue is whether there should be
an overlap with the new auditors in the changeover
year. Easy to recommend. Very difficult to
implement.
Finally, a bit on what we mustn’t do. Let’s not make
knee-jerk regulations and come up with a
Sarbanes-Oxley kind of legislation. India is
over-regulated and under-enforced. Our laws and
regulations suffice. Time we gave the regulators the
teeth to enforce them with speed and decisiveness.
Published: Business World, January 2009