Further to my article on Satyam fiasco (http://cipher1980.blogspot.com/2008/12/satyam-computer-services-and-corporate.html), I came across a good article by Omkar Goswami in this week’s Business Today magazine.

Corporate governance: The strange case of Satyam

I serve as an independent Director on the Board of Infosys Technologies 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 nighttime.”

Omkar Goswami, Chairman, CERG Advisory
Omkar Goswami
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 the 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.

<p style="tex
align:justify;margin:0 0 10px;”>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 a 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.