Corporate Administration in India has both aided and pulled down the state ‘s ascent to the top ranks in the universe economic system. While in theory, the commendable attempts of Ministry of corporate Affairs in concurrence with the legal system provides a good corporate administration model ( Cite Website ) and a good protection for investing, the existent job begins with the enforcement with an excessively corrupt system and over-burdened judicial system. The Large Picture of corporate India shows that entrepreneurial and household based concern theoretical accounts continue to be dominant and even large corporations like Infosys ( cite web site ) hesitant to step out of this. Besides the spread between the ordinances of coverage demands and the existent sum of attachment to these ordinances are glowering and of great concern. The composing of the board and the function of the Independent managers are besides really ill-defined and capable to unfavorable judgment in even the large corporations that have planetary range.
In this essay, we shall try to analyze these practical troubles with the illustration of the instance of Satyam Computer Services dirt that broke out in early 2009 exposing the failings of Corporate Governance in India Inc and put the operation of the Indian boards and its managers under the scanner.
The Scandal
On the forenoon of Jan 7, 2009, Ramalinga Raju sent out a startling missive of disclosures to his board of managers and securities and exchange board of India ( SEBI ) admiting his blameworthiness in concealing the intelligence that he inflated the sum of hard currency on the balance sheet by about a $ 1 billion and over stated sep 2008 quarterly grosss by 78 % and net incomes by 98 % . It all began as a fringy spread between the operating net incomes and the one reflected in the books but grew to unwieldy proportions over clip. This fudging of history started when Raju like all male parents tried to make an imperium for his two boies in the signifier of MAYTAS infra and MAYTAS info and started to deviate financess satyam into these companies. His last attempt to hush up this dirt with a command to buy Maytas infra was thwarted due to the resistance of some of the managers.
This dirt equated with the Enron of USA was orchestrated by Raju in concurrence with the CFO V Srinivas and Satyam ‘s hearer Arthur Anderson, from Price Waterhouse Cooper. And all this was coming from a company that received the coveted Golden Peacock Award for excellence in Corporate Governance merely 4 months ago in October 2008 ( which was subsequently retracted ) ( insert ref ) .
The board
Ramalinga Raju – Laminitis and Chairman from the beginning in 1987 till the dirt broke out in Jan 7 2009. Resigned his place and surrendered to the governments for probe.
Rama Raju – Chief executive officer and MD. Brother of Ramalinga Raju and equivalent in power and authorization.
Ram Mynampati – Fulltime Director and interim CEO after the Raju ‘s Resignation. He was the highest paid with a bundle of Rs 35 million yearly higher than the laminitis and all other managers ‘ compensation put together. Considered to be ‘right arm ‘ of Raju. He continued to be interim CEO boulder clay February 5, 2009 when Government appointed board took over with A S Murthy as CEO. He flew to the US instantly to avoid constabulary question.
Dr Mangalam Srinivasan – Independent Director. Advisor to Kennedy School of Government, Harvard University. One of the long-serving managers of the Satyam ‘s Board and foremost to vacate owing to ‘Moral duty ‘ holding failed to project a dissent ballot with the botched up trade to purchase the Maytas companies came up before the board.
Mendu Rammohan Rao – Full Time Director and chaired the December 2008 meeting which approved the $ 1.6 billion acquisition of Maytas. He is besides holds many other honorable places including that of the dean of the reputed Indian School of Business ( resigned a twenty-four hours after the dirt ) and the Government panel to choose a Reserve Bank of India ( RBI ) Deputy Governor ( besides resigned after the dirt ) .
TA R Prasad – Independent Director. He was a former administrative official from the Indian Administrative Service ( IAS officer ) who rose to the ranks of Cabinet Secretary with the Government of India and has headed administrations like Maruti Udyog Limited and was the board of many reputed companies like TVS Motors, Taj Group of hotels, Delhi International Airport, etc. He continued to be on the board till the Indian Government stepped in and suspended the board on January 9.
Krishna G Palepu – Independent Director. Based in the US, he was besides a Harvard Business School professor and 2nd highest paid in the board ( around 10 million Indian Rupees ) . His function as Independent manager came under examination for O.K.ing the Maytas acquisition trade along with Ram Mohan Rao. He was besides the Non-exec Director at a drug company major, Dr. Reddy ‘s research lab and had to vacate after the incident.
Vinod K Dham – Independent Director. Held assorted high places including Vice President of Intel, Vice President of the AMD Computation Products Group and was a good known Venture Capitalist. He was one of the approvers of the acquisition trade but resigned on December 28 after Raju ‘s Confession.
Professor V S Raju – Independent Director. He was besides the former manager of IIT Delhi and besides the adviser the Byrraju Foundation run by Ramalinga Raju.
Criticism on the board Structure
As a company listed on the NY Stock Exchange, Satyam is bound to follow by the chief corporate administration patterns as that required of US companies. The general composing of the board looked healthy with bulk of Independent managers ( 5 out of 9 ) .However ; there are assorted glowering injudiciousnesss in attachment to these patterns. Some of the primary 1s are
Lack of Financial Acumen
By Regulation, the company should hold disclosed if they have identified a member of the board to the Audit Committee Financial Expert. Satyam ‘s board does non hold an single matching this description and this was openly admitted in its August 2008 Form 20-F filing with the Securities and Exchange Commission: “ We do non hold an single helping on our Audit Committee as an ‘Audit Committee Financial Expert ‘ as defined in applicable regulations of the Securities & A ; Exchange Commission. This is because our board of managers has determined that no single audit commission member possesses all the properties required by the definition ‘Audit Committee Financial Expert. ” ( Business Week )
Meeting of Independent Directors:
The Independent Directors, by ordinance must run into on a regular basis without the presence of the Management board members to discourse executive determinations and issues. With the Independent managers separated geographically and were portion of the board for legion other companies, these meeting ne’er happened.
Bandwidth and capacity of the Mugwumps
Besides one of the other celebrated factors in the 2008 SEC filing was that two of the independent managers T R Prasad and Vinod K Dham were functioning on 8 other boards in add-on to Satyam ‘s. And Except for Vinod Dham, who had antecedently served as former chairman/CEO of Tech Company, others were faculty members and one of them ( T R Prasad ) was a administrative official and former Cabinet Secretary with no existent concern or direction expertness in that peculiar sector.
The Dilemma
The Basic Dilemma confronting the board was caused by the board ‘s blessing of the purchase of Maytas Properties and Maytas Infrastructure for $ 1.6 billion. On 16th December 2008, the board nem con approved the trade mentioning that these minutess would supply Satyam with good needed ‘unrelated variegation ‘ . And this determination was about imposed upon the investors.
However, there was a big sum of chromaticity and call among the investors peculiarly the institutional investors indicating out that these two companies were owned by Raju ‘s boies and the household had a much larger interest in these two companies than in Satyam and that this would tantamount to syphoning money into Raju ‘s custodies from Satyam. Though the move was instantly aborted, the harm to the repute of Satyam ‘s ‘Golden Peacock ‘ image was more than damaged. By the terminal of December, Forrester Research had advised clients to halt making concern with Satyam on the premiss of possible widespread fraud.
And now, the board were on the horns of quandary.
Do we lodge with the legitimacy of the determination?
Or
Do we profess that this was a entire failure of all moralss and administration?
But the worst was yet to come. In the undermentioned 2 yearss, there was a watercourse of surrenders from the Independent managers with Mangalam Srinivasan being the first, saying that she is vacating on the evidences that she was non able to play the function of a proper Independent manager in the just spirit and ballot against this haphazard attempt to cover up a large-scale fraud. This was followed by surrender from Vinod Dham owing to moral duty.
But Directors like Mendu Ram Mohan Rao and Krishna G Palepu stuck to the legitimacy of the determination. Both of them being outstanding academicians and particularly Krishna G Palepu who teaches and writes about moralss and CG at Harvard, supported their statement saying that they had done their portion of ‘due diligence ‘ on the trade and had really elaborate treatments. Owing to their point of view, they decided non to discontinue.
While there were these two extremes, T R Prasad, although shocked by the disclosures, decided non to go forth but instead stay and tip Satyam through the convulsion. But merely until the Government had to step in and suspend the bing dysfunctional board and organize a new board.
The result
The Worst Possible Outcome
Looking back at the issue and what has transpired from the board ‘s consentaneous determination to put in Maytas companies on the fatal twenty-four hours in December, possibly the worst possible result of this full debacle is that blunder up trade goes unnoticed by the institutional investors and they let Raju travel in front with the trade and thereby doing himself richer. But that does n’t intend that he acquire off with this. It merely helps the bubble get bigger before it bursts and the effects could hold been worst. If this gesture has been carried through, so Raju would hold successfully defrauded a bulk of the US institutional investors and when the bubble has burst ( which finally will ) past that point, which would hold led to a category action suit in the US which will hold even tougher reverberations. And possibly, Raju ‘s determination to blossom the dirt himself in India instead than vanishing into the US was a deliberate legal move. Because, in India he had to confront the governments and imprisonment for about a twelvemonth and a half till October 2010 when he was finally granted bond until he is convicted and proven guilty of charges by the bench. Which he knew was a long blown procedure.
The most feasible option ( s ) :
Possibly the most reasonable determination ( or what could hold been a good calculated move judicially, financially, etc ) made by Raju was his determination to stop this at his ain custodies, which started everything, before things got even worse. His timing was faultless every bit good. Before he came clean with his statement to his board of managers and SEBI, he had sold most of his retentions in Satyam cut downing it from 17.8 % to a mere 1.6 % .
And speaking from the most feasible option from the corporate administration position, on the face of such glaring and blazing misdemeanors of the jurisprudence and ordinances, the governments ( The authorities and SEBI ) should hold stepped in manner before the acquisition trade gesture was carried out and carried out remedial steps like corporate restructuring and inspection and repair and so likely should hold put this company on the market for a possible coup d’etat by the competition. In that manner, this full issue would hold remained a instance of a dirt that was brought under control by the regulative organic structures and intelligence in the market would non hold been more than that of a bad coup d’etat instead than a dirt of Enron proportions that shook the foundations of corporate India which is already stifled by corrupt system and patterns.
The right thing ( Recommendations )
If we look at this issue in retrospect and use our logical thinking, possibly the best manner to hold dealt with this is by making the ‘right thing ‘ from the beginning to hold avoided this state of affairs. When you talk about the right thing that could hold been done in this instance, we are left with multiple angles.
For the Chief executive officer:
The missive by Raju to the board on Jan 7 were merely disclosures of the abnormalities and injudiciousnesss which summed up to a billion dollar dirt coordinated over old ages together get downing likely from 2004 when he tried to construct ‘an imperium ‘ for his boies from the siphoned off financess from Satyam. For a company whose name literally means Truth and won the awards for the best corporate administration attachment, Raju should hold done the justness and did the right thing when he was,
Thinking of maximizing his personal additions by making non-existent employee base to pull deceitful wages for his personal additions.
Siphoning financess away Satyam to make new entities for his boies in a typical manner gaining that it was non his imperium that he could manus down to his boies but an entity belonging to public in general and stockholders specifically.
But when the top most executive is captive upon victimizing the company, there is small that one can anticipate out of him in term of bar of a catastrophe of such demeaning nature.
For the Independent Directors:
The full fiasco has cast a limelight on the function of the Independent Directors in implementing effectual corporate administration steps in corporate India. And this raises a series of inquiries right from the assignment of those managers to their functions when they are faced with such contingencies
Appointment of the Mugwumps:
Section 49 of SEBI Act and Section 229A of Companies Act of 1956 provides the judicial admissions and guidelines for the assignment of Independent Directors in companies protecting the public involvements at big and the stockholders involvements in peculiar. But the attachment to these guidelines is a affair of argument when we consider the assignment of people like T R Prasad, Krishna G Palepu who had no anterior experience in running similar companies. They were here merely because they can nod their caput to the determinations of Raju doing him even more bossy.
Independent ‘s function in the face of hardship:
Besides the Question arises whether the Independent managers did the right thing in the aftermath of the unmasking by vacating from the board. Some of them left because of the moral duty and the other finally had to. But is n’t there an option of the independent managers banding together and remaining on board and altering the administration of the company? Possibly yes, but, it is difficult to remain on that class. But still it is a possibility instead than rinsing the manus off like Krishna G Palepu who went on records stating that he is non lawfully apt to vote on the Maytas proposals because he was non present in the board meeting. But on the other manus he claims to hold had ‘threadbare ‘ treatments and due diligence on the affair before voting for it.
Independent Board Leadership
Though Satyam had a good bulk of mugwumps and a good mix of expertness, there were big insufficiencies in the functions and duties that were typically required of a normal board of managers. Apart from the deficiency of fiscal acumen cited already, there is besides a possible struggle of involvement with the functions of CEO and Chairman as the two persons were brothers and members of the same direction. Besides the company had no Independent board leading, wherein one of the mugwumps is appointed as the senior independent manager and has the corporate authorization of the mugwumps to dispute, if needed, the errors of the CEO. And as already mentioned, the absence of meetings of the mugwumps without the direction did non assist much in making a incorporate voice for the mugwumps.
Board Committees
Besides one of the glowering goings from “ best patterns ” in administration is that there was no nominating/Corp Governance Committee and alternatively they had a instead uncommon “ Investors ‘ Grievance Committee ” which likely might hold seen plentifulness of activity in the wake of the disclosures.
For the Audit house and the Regulatory Bodies:
The full episode has besides cast a limelight on the function of PwC as the hearers. They have been scrutinizing Satyam ‘s books from 2000 and hold failed to ( or have turned a blind oculus to ) the immense uses in the balance sheet and the income statements. They have failed to verify the fabricated bank sedimentations which were non gaining any involvements for considerable period of clip. And suspiciously plenty, PwC was paid twice than what other companies would bear down for the same raises inquiries whether they were complicit in the fraud. And interestingly adequate it merely took 10 yearss of due diligence on the portion of Merrill Lynch to happen out about this mammoth fraud and call off the battle merely hours before the issue erupted.
A The CFO Vadlamani Srinivas went on the records stating these lacks were ne’er pointed out and that the bank sedimentations were handled straight by the Raju Brothers and he was asked non to look into it. This was corroborated in Raju ‘s Confessional statement.
And though regulative organic structures like SEBI and The Ministry of Corporate Affairs had SOX like conformity steps in topographic point, the enforcement was non truly looked into. On the aftermath of the dirt, Ministry in concurrence with SEBI had promised inventing a new Corporate Code but in my sentiment it should besides see alterations to securities Torahs to ease the stockholders to convey about category action cases.
Decision
Therefore in decision, from the benefit of hindsight, we are able to clearly see that Satyam ‘s Achilles ‘ heel was the fact that the Board members, peculiarly the Independent Directors really work for the people who brought them onto the board with more of an employer – employee position. But they should hold realised that engaging people who ever work in favors would strip the company of any whistle blowers and what you would be left with is merely an eternal series of buddies who do n’t believe twice if what they do is the right thing and is in the right spirit of the rules of corporate administration. Besides India Inc should take the lessons learnt from this debacle in footings of best patterns in corporate administration
Family based theoretical account
Role of Independent Directors
Conformity and ordinance of auditory demands and its enforcement mechanisms.
However, the province of Corporate Governance in India does non compare unfavorably to other major emerging economic systems like China, Brazil, etc. And most significantly, the landscape is altering fast over the last decennary with the enforcement of Sarbanes Oxley type steps in the 2006 Amendment to the Companies Act and the legal alterations to allow better rights to creditors, etc. But still, merely one more repeat of a ‘Satyam Like ‘ episode is more than plenty for the investors in India to earnestly oppugn their slogan and draw out impacting India
Appendix
Ramalinga Raju ‘s missive to the board and SEBI on Jan 7, 2009 ( Printed Copy )
