EVERY so often, it takes one isolated instance of misdemeanour to spark off renewed demands for improved corporate governance. The need is felt more acutely in times of slowing demand; when the going is good, caution–and, indeed, good corporate governance – is thrown to the winds. Everybody swims along with the tide, and the whistle blowers are branded society’s curmudgeons.
The whole corporate governance issue is popping its head up again after the pandemonium over the sordid Satyam-Maytas business. Much has been written, debated and blogged over the proposed $1.6-billion merger between the two companies, but you can bet your last last dollar that the last word has not been spoken yet. The government in Delhi, the regulators in Mumbai, the shareholders in New York have all jumped in and expect some more fireworks over the next few weeks.
The initial public outburst was caused by news that listed company Satyam Computer Services was using its free cash – which belongs to all its shareholders — to buy out two unlisted infrastructure and property development companies, both owned by the managing shareholders of Satyam. These companies were ostensibly incurring losses and the buyout would have given them a fresh lease of life. The deal had to be subsequently jettisoned as shareholder fury shaved off over 30% of the share price in India and over 50% in the ADR values in New York. Chastened by the loss to the shareholders, the company then announced a buyback. Even this is being seen as weird – using company cash once again to prop up share prices when other options could have been examined.
But, all this has refocused attention on what constitutes proper corporate governance. One of the issues raised is the role of independent directors and whether they can be held accountable in decisions like these. Market regulator Securities and Exchanges Board of India has been pressing companies to increase the number of independent directors on their boards who will, presumably, represent the interests of the minority shareholders. In the Satyam-Maytas muddle, fingers have also been pointed at some of the independent directors, eminent professionals in their own right, who unanimously approved the deal.
So, does the mere fact of having a certain percentage of the board as independent directors really help? In USA, it was found that many CEOs were getting their pals and cronies appointed as “independent” directors and using them to get their pay packets and bonuses inflated. Who monitors whether the word “independent” truly stands for what it is supposed to denote? It is difficult to really prove that a person is truly independent, unless his actions prove otherwise.
Sebi has been trying hard to get public sector units, which are listed on the stock exchanges, to appoint at least 50% of the board as independent directors. This has led to enormous complications, including the debate whether in the case of a breach, Sebi had the powers to penalise a PSU company, which can be considered as an arm of the government. The situation could also extend to the bizarre. Take the case of steel maker SAIL, which now has about 22 members on its board. Or, the case of ONGC which has 17 members, comprising six executive directors (besides the CMD), two government nominees and eight independent directors
There is a similar farce playing out in the public sector banks. Vadodara-based Senior Citizens Service Trust has filed a public interest litigation (PIL) in the Gujarat high court over the way 37 “independent” directors have been appointed to the boards of various PSU banks, of which 33 owe their allegiance to the Congress party. The independent directors are supposed to act as custodians of the public money deposited with the banks and ensure that it is not all frittered away through dubious loans.
Another area that’s crying out for some vigilance by its directors is the mutual fund industry. The recent crisis in the mutual fund industry – especially, as a result of the spree in launching fixed maturity plans — should force Sebi to begin reviewing the role of trustees in the three-layered mutual fund industry. Many experts believe that trustees in an asset management company are somewhat like independent directors in companies and should truly live up to their role of safeguarding investor interest.
The point is this: none of the trustees was asking questions when the funds were busy launching one FMP after another. In many other companies, directors looked the other way while managements were busy massaging valuations with fictitious data. Today, they are trying to court indignant shareholders and convince cash-flush banks that they run bankable businesses. But no one’s biting yet.
CAclubindia
