‘Boards are becoming a joke in India’

Dr N Balasubramanian is a respected academic, practitioner and author on corporate governance, who has held executive and board positions in companies including Wipro, iGate Global Solutions and the Union Bank of India. Currently, Professor of Corporate Governance, and Chairman, Centre for Corporate Governance and Citizenship, at the IIM (Bangalore), he has authored several books on financial policies and shareholder returns. He gives his views on this week’s controversy around the Satyam Computer board’s decision to buy out two other companies promoted by family members of chairman Ramalinga Raju.

What do you make of the Satyam episode? What are the lessons in it for the Indian corporate sector?
In the governance hierarchy, shareholders are the ultimate owners. They elect a Board of Directors, and because the owners do not directly participate in day-to-day management, it is the board which is their representative. We talk about the agency problem where the executive management’s sole objective is to promote its interests by way of more pay or stock options. The board’s job is to oversee the working of the executive management. But I have always maintained that you cannot completely eradicate vested interests; The issue is how much you can minimise it.

Given the ownership patterns in the Indian corporate sector, is it possible?
Yes, and the question of how much depends on the kind of ownership — whether fully diversified or dominant, where some individual or group has control. In the present instance, the Rajus have minority ownership but are dominant as they hold operational control. There are three kinds of dominant ownerships: family dominance, management dominance in a multinational style of functioning, and state dominance. But in the case of diversified groups, the Board of Directors has to protect shareholder interests from the executive, in the case of a diversified ownership. And in the case of dominant ownership, it has to protect shareholder interest from both the ownership and the executive. That is one of the reasons why independent board members are important.

But what do you do when the Board of Directors appears to be loyal to the dominant owners who appoint them, rather than the general shareholder?
At the end of the day, independence is the strength of character. The board is also seen as a collegial body, where it works with the management and the ownership, but objectively. But it is not uncommon that even five-star boards — as in the case of Enron — falter. For that matter even the Satyam Computer board is a five-star board.

So why did this five-star board not act properly?
Before I answer that, let me say directors are not expected to be supermen. All that is expected of them is to be objective, rational, and competent individuals. That is what the courts, too, would expect of the directors; to carry out their trusteeship duties with care and loyalty - care, demonstrated by application to the job like attending meetings and going through the papers diligently, and loyalty, by not making private profit out of company information that comes to you as a director of the company. The courts do not second guess the Board of Directors unless it is proved that members did not discharge their duties. Generally speaking, members of the board are expected to perform three roles: contribute to the wealth creation in the company, counsel the management and ownership, and control the transfer of wealth creation between the shareholders. The question to ask is, did the directors of Satyam discharge these duties the way they should have?

Getting into specifics, do you think they did?
Considering it was a related party transaction, the Satyam board seems to have maintained form in this case. But it may fail the test of loyalty to shareholders as the strategy for derisking, if it was presented to the board the way it should have been, does not appear sound. You don’t de-risk by taking on another industry that is equally risky. And then, which was the party that prepared the valuation report and was a scan of other potential candidates carried out? If the promoters of Maytas were different, it would be a different case altogether. Generally speaking, the courts will look at whether the board exercised the logic a common man would have. Given this conflict, and the reactions from the stock markets, how come the board did not think it was risky? Why and how did the board think differently?

How would you have reacted if you were on the Satyam board?
I would have been hesitant to support the proposal. In cases like these, when subsidiaries or related companies are being merged, it is customary for the independent board members to meet separately and discuss the issue, and in some cases, even appoint an independent valuer. My advice to my class is, if something looks too good to be true, probe it