I serve as an independent director on the Board of Infosys
Technologies Limited which, in instances, competes with Satyam
for bagging key projects. What follows here has nothing to do
with my being on the Board of Infosys; it has everything to do
with the tenets of corporate governance that I believe in and
have publicly advocated for the last decade.
In Arthur Conan Doyle’s Silver Blaze, Watson asks Sherlock
Holmes, “Is there any point to which you wish to draw my
attention?” Holmes replies, “To the curious incident of the dog
in the night-time.” Watson says, “But the dog did nothing in the
night-time.” And Holmes remarks, “That was the curious
incident.”
Good independent directors are like watch dogs. Mostly they will
be collegial and work in tandem with management to grow long
term shareholder value. But when management contemplates
something which may be inimical to the value or reputation of
the company, or hurts the rights of minority shareholders, it is
their responsibility to bark. No definition of ‘independence’
matters if, at the end of the day, you cannot stand up to
management and be counted.
Now to the Satyam episode. Here are the reported facts. Satyam
is a publicly listed company in India and in the US. Its
promoters, led by Mr. Ramalinga Raju, own 8.74 per cent of the
shares of the company. The public owns almost 72 per cent of the
stock, of which 48 per cent is held by foreign institutional
investors (FIIs) and 12.9 per cent by Indian public financial
institutions (FIs).
This is what Satyam’s management and promoters proposed. A group
representing only 8.74 per cent of the stock wanted to use $1.6
billion of Satyam’s free cash to buy 51 per cent of Maytas Infra
for $1.3 billion, and 100 per cent of Maytas Properties for $300
million. Maytas is Satyam spelled backwards; and over 36 per
cent of Maytas is owned by Raju’s family, led by his sons Rama
Raju and Teja Raju.
Let’s assume that the valuations were right. Even so, this was a
massive related party transaction. In effect, persons
representing a mere 8.74 per cent of a listed entity were
proposing to transfer a whopping $1.6 billion of the company’s
cash to pay related promoters (i.e. themselves) of another
company. Irrespective of the debatable strategic merits of the
deal — an IT company wanting to de-risk by purchasing
infrastructure assets — corporate governance ethics demand that
such a proposal ought to have been sounded out to institutional
investors before making the announcement. And if that was done,
the conclusion was foregone: FIIs and FIs would have given their
thumbs down, as they indeed did.
The Satyam episode is lesson in more ways than one. It shows
that managements can put forward questionable transactions and
expect Boards to give their assent — a fact that should make
independent directors be ever more vigilant in discharging their
fiduciary responsibilities. It also shows the power of
institutional shareholders and the press. This is the second
instance in recent times where FIIs and the fourth estate have
forced management to rescind decisions that are inimical to
shareholder interests. Hats off for that. Because codes of
corporate governance are only guideposts. When you deviate, the
press and activist shareholders have to severely rap your
knuckles.