Independent Directors Resign from Satyam Board ....

Satyam drama has raised issues on corporate governance. Not surprising because the markets only focus on what they want. To us the crux of the issue is the role of Independent Directors. The media has taken-off on the independent directors of Satyam and most of them have resigned. Is the media justified in flaying the independent directors? Are investors right in assuming that Independent Directors will fight for the right thing?

The key is can Independent Directors be "motivated" and "independent" at the same time. If not, aren't the expectations too much from them?

Let's first see why people join the Boards of Companies to become Independent Directors - different people have different reasons - but some of them could be -

• adding to their status
• perks that help you get free business class trips to India.
• hope that they can leverage this position to further their own business
• in some cases, pretty decent income as commission on profits
• relationship / friendship with the promoters

Most of these goals are attained by "joining" and "continuing" to be on the Board. Since they have no financial gains from being on the Board, they really have no serious interest in the Company's affairs. The benefits they were looking for will keep coming to them as long as they are on the Board.

Now let's look at this from the Company's perspective. Why does it want "some people" to be on its Board as Independent Directors. Again many reasons, but some of them could be -

• Compliance requirement to have a minimum percentage of independent directors.
• Eminent members on the Board to increase the Company's stature.
• Professional advice.

The Directors are generally brought on to the Board by Promoters. The Promoters are happy to have people on Board so long as it doesn't cost much for them and they are benefiting from this relationship in some way or the other. And most importantly, as long as they are free to do what they want.

So both, the Directors and the Company, get what they want and do not want to rock the boat.

Bigger companies like Satyam may be following good Board practices (not the same as good Corporate Governance) - proper notices, Agenda, regular meetings, circulation of minutes, etc. Forget good corporate governance; there is a vast majority of companies that don't do any of these basic things.

The Satyam episode is likely to be a wake-up call to all independent directors who have till now assumed that they have nothing to lose. Several questions will come to their minds and make them rethink on their role as an independent director.

• why are they on the Board of the Companies?
• what benefit are they expecting / deriving from these relationships?
• what are the legal responsibilities?
• am I really competent and knowledgeable to help in key decisions that are taken by the Board?
• is it worth being responsible for something on which they have no control?
• is it worth taking the risk of being pursued by ED, ROC, Courts, Police, Media, etc?
• is it worth being hauled up in public or by media for actions of the Board, especially for decisions which they did not like but did not officially record as dissent to keep the good relationship going?

The media, investors and all regulatory authorities are of course right in expecting that Independent Directors will take the right decisions. After all it is their duty and responsibility. So what if they are not benefiting in any way!! Even If they have chosen to do this as a social service, they are still responsible.

ONE CANNOT AVOID RESPONSIBILITY FOR DECISIONS TAKEN AT THE BOARD MEETINGS WHERE THEY WERE PRESENT - THE RIGHT TO DISSENT WAS ALWAYS THERE - AND SO WAS THE RIGHT TO RESIGN.

THE CHOICE IS THEIRS. Most promoters cannot accept dissent and therefore it creates rifts and spoils relationships. After the Satyam episode many independent directors may choose to resign from Boards rather than create unpleasantness in their relationships.

AND IF THEY HAVE SOMETHING SIGNIFICANT TO LOSE, THEN THEY ARE NOT REALLY INDEPENDENT, ARE THEY?

Vivek Bhargava