Dec 19, 2008

Business - L'affaire Satyam

The Satyam bid to merge itself with two infrastructure companies controlled by the same promoter group (the Raju family) will rightly go down in Indian corporate history as an object lesson in corporate misgovernance. The company’s board has quickly reversed the merger decision, in the wake of a shareholder revolt and a crash in the company’s share price (by about 50 per cent in New York), and it now seeks to recover lost ground through a share buyback offer. But it is worth bearing in mind that, in the case of many companies, such an offer has ended up being nothing more than a bid to bolster the share price, without any shares actually being bought back.

How this will end is therefore too early to forecast, but there can be little doubt that the promoter group, led by the company’s founder-chairman, B Ramalinga Raju, has lost a good deal of shareholder trust, and some of it may never be regained—with good reason. It passes understanding as to how a promoter group can hope to change a company’s principal business without going to the general body of shareholders for their approval, especially when the promoters hold no more than 8.6 per cent of the company. The decision is even more dubious when the addition of a main line of business (with which there is no synergy or indeed any connection whatsoever) is sought to be achieved by a merger with firms controlled by the same group—with no transparency on how the relative valuations was done, because this information too has not been given to shareholders.

Promoter families taking other shareholders for granted is not new; indeed, it is all too common. They got away with it in the past because retail shareholders felt powerless to influence the way the company was being run, while domestic institutional investors (both the public financial institutions of old as well as mutual funds) usually adopted a compliant attitude, even when they were represented on the board. Things began to change after foreign institutional investors (FIIs) came on to the scene some 15 years ago; in the latest episode too, it was the FIIs who led the revolt and immediately dumped the company’s stock.

It is worth noting that it was not any corporate governance rule or action by the stock market watchdog that stopped the company in its tracks; nor was it the independent directors, on whom so much reliance is placed in corporate governance regulation. Indeed, the Satyam board was packed with independent directors who are men of standing, and whose credentials no one would ordinarily question: the dean of a prestigious business school, a well-known professor of Harvard Business School, a former director of the Indian Institute of Technology in Delhi, a retired cabinet secretary, and the like. That such worthies could be parties to a decision that met with instant shareholder anger raises legitimate questions about whether too much faith is in fact placed on independent directors. The fundamental weakness in this model is the fact that independent directors usually have no stake in the success of the business; indeed, in some other cases it has been revealed that independent directors were being financially benefited in a variety of indirect ways (like supplier contracts to relatives), and therefore beholden to the company management. In the case of Reliance, for instance, the level of adherence to corporate governance norms became known to the world at large only when there was dissension in the promoter group, leading to several startling revelations.

While it would be wrong to paint everyone with the same brush, the Satyam episode certainly raises questions about what standards of corporate governance exist, beyond the talk at seminars and the many codes that have been framed. It is unfortunate that Corporate India’s image should be dented in this fashion; but it would be even more unfortunate if the Satyam case did not lead to a more careful scrutiny of what exactly goes on in Corporate India.