Monday, December 29, 2008

All-pervasive lack of governance in the system

I wrote the following in my column in Business Standard today:-

It is always tempting to write a ‘year that was’ piece towards the end of December. This column will not do so. Instead, it seeks to look at three unrelated current events that would remind one of how another year may go by, but the poor quality of governance remains unresolved in India.

At the political level, the Mint published a pseudonymous open letter to Prime Minister Manmohan Singh – the pseudonym ‘Athreya’ purported to protect the identity of the author, stated to be a serving civil servant. The piece contained no scandalous or mouth-watering exposé. It was a general critique of how poorly India is being governed – quite the type of piece that the ex-columnist finance-minister-turned-home-minister P. Chidambaram would have written when not in government.

Opposition MPs tabled the piece in Parliament. Rather than use Parliamentary diplomacy, Mr. Chidambaram chastened the shielded bureaucrat author for not having the guts to come out in the open. The Minister was perhaps not just technically and legally correct, but even tactically right. His brief was indefensible on merits – he could not have said much against the merits of the general critique. Athreya’s clichéd truisms underlined how weak the government has been on so many counts – indeed as have been many of earlier governments.

On the corporate side of society, the Satyam-Maytas deal exposed how Corporate India is left with little moral authority to critique the political side of the spectrum. A listed software company agreed with its “promoters” (legal definition: persons in control over the company) to acquire their equity stake in two real estate companies. Under Indian law, interested parties are not permitted to participate in the decision in any manner, and the decision ought to have been taken solely by non-promoter directors.

The independent directors unanimously decided to do the deal. The deal would be India’s largest-ever related-party transaction – USD 1.6 billion would flow from the listed company (over 90% owned by public shareholders) into the hands of the promoters, and the software company would pay to gain real estate interests. Six out of Satyam’s nine-member board are “independent directors” (as defined in securities regulations) and comprise four pedigreed academicians, a former Union Cabinet Secretary (in his day, perhaps ranking higher than the Mint’s Athreya) and one of the founders of Intel’s Pentium chip. These worthies had won for Satyam the Golden Peacock award for corporate governance this year.

The market screamed murder. Some investors said they would go to any lengths to actively frustrate the deal. The stock price tanked over 50%. Funnily, the deal was called off overnight.

With the deal, the gloves too came off. Independent directors suddenly claimed to have opposed the deal at the board meeting. Initial talk of the valuation having been justified is no longer being underlined. In hurried self-cleansing, Mr. T.R. Prasad, the former Cabinet Secretary spoke to the media about the concerns he had raised at the board meeting. It did not matter to him that either he had believed his concerns had been addressed or he never really raised any serious concern – remember the board decision had been unanimous.

Not one independent director spoke of why they suddenly lost conviction to stand by the deal they had unanimously approved. The chairman of the unanimous board decision, Mr. M. Rammohan Rao, the Dean of the Indian School of Business (a school to which Satyam or its promoters are said to have made donations), is reported as having said that the board had been “concerned” but had decided to “take the risk” and “see how the market reacts”. Only one independent director Ms. Mangalam Srinivasan had the humility to admit in writing that regardless of concerns expressed, she did not positively voted against the deal. She resigned owning moral responsibility.

While on governance, it is noteworthy that the Securities and Exchange Board of India (“SEBI”) recently announced a Code of Conduct to regulate its own Board of Directors. The Code of Conduct entails disclosure of conflicts of interest, and procedures for dealing with conflicts. However, since governance goes beyond board-level discipline, on an unrelated note, SEBI has been left red-faced as the year draws to a close.

A news report was published on December 22 that SEBI had directed an open offer to be made for shares of a listed company at a high premium to current market price. SEBI clarified the next day that the news report was false. It turned out that SEBI’s letterhead had been forged. However, at least one full trading session went by and the price skyrocketed without the news being clarified.

The administrative governance of the judicial system, which often criticizes the public and private arms of our society, too has little to be proud about – suits filed two decades ago are still being tried in the Bombay High Court.

As the year draws to a close, the lack of standards in governance in every walk of our life is apparent. We are moving into election year – where the Indian people will decide who will govern them for a scheduled term of another five years.

2 comments:

viji said...

The Article reflects the sad state of affairs, be it Corporate Governance, Inaction of Independent directors or general apathy of Public.
Can you suggest remidial measures atleast for active role of Independant Directors and better Corporate Governance

Anuj said...

Dear Som, Your articles always stimulate the thought process..your ability to link the social concerns with the financial ones is unique..thanks for the sharing your views through the blogs, the articles in business standard and on NDTV profit and CNBC. Wish you a wonderful new year ahead.