Did the promoter, B. Ramalinga Raju, and his co-conspirators inflate Satyam’s books? Or was Raju’s 7 January confession all smoke and mirrors to hide siphoning of funds to finance property deals? Was Price Waterhouse a negligent auditor? Or is it being made the scapegoat? Did the internal auditors capture serious deficiencies in financial reporting processes or were they blinded as well? Was it a few guys doing under-the-radar swindles for many years, or some mega-ticket items over the past year or so? Was the board sleeping on the watch, or did it get comprehensively duped for no fault of its diligence? Why did Raju confess? Like Rashomon, there are many conflicting and mutually contradictory stories — whose truth will be out, if it does, only after detailed investigations.

The purpose of this article is not to suggest yet another explanation of what happened because, perhaps, only Raju and his ilk know that in its entirety. Instead, it is to suggest what we can learn from Satyam regarding corporate governance, and indicate some do’s and one major don’t.

Let me outline a few things that we must consider very quickly. First, it is absolutely imperative that if promoters, their families and associates pledge any shares, this must be declared to the board, the stock exchanges and Sebi. Issues about an individual’s right to confidentiality can be overcome by declaring the pledge as a part of the promoter group.

Second, no director belonging to the promoter group or the management should be a member of a listed company’s audit committee. Thus, the audit committee of any listed company must consist exclusively of independent directors — and not two-thirds as currently prescribed by Clause 49 of the Listing Agreement.

Third, we have to debate the need to separate the role of the chairman of a company from that of a CEO. This is not a black-or-white issue and has much to do with extant customs and procedures. For instance, the UK has much more of this than the US. I am not suggesting one or the other. But I am advocating the need for a more intensive deliberation.

Fourth, it is necessary to realise that the present ceiling on the number of directorships is too generous, and can be inimical to good corporate governance. At present, Sebi specifies that no director can be a member of more than 10 committees of the board or be a chairman of more than five such committees. We need to review this. My sense is that in the post-Satyam era it will become increasingly difficult for independent directors to properly discharge their fiduciary responsibilities if they serve on 10 boards or more. It is not for law or regulation to prescribe the optimal number of board positions that a person should accept. But it can prescribe a ceiling. And 10 is more than enough.

Fifth, we also need to revisit a non-mandatory provision of Clause 49 — namely, that independent directors should step off boards after nine successive years. There was a furore across corporate India when the Narayana Murthy committee suggested it, which made it a non-mandated suggestion. We need a re-think. I believe it makes sense, because a very long association with any board can potentially diminish the objectivity and watchdog-like behaviour that shareholders have the right to expect from their independent directors. My preference is to start with 2004, when the new Clause 49 came into being; and count off nine years from then. So, anyone who was an outside director on the board of a company in 2004 ought to demit office no later than 2013.

Sixth, we should re-examine the rotation of statutory auditors — perhaps after six successive years. They also should not have too long an innings with any company. Six years is fair; it takes a year or two to get well versed in the company’s business, and four more to leverage that knowledge to produce results. A related issue is whether there should be an overlap with the new auditors in the changeover year.

Finally, a bit on what we mustn’t do. Let’s not make knee-jerk regulations and come up with a Sarbanes-Oxley kind of legislation. India is over-regulated and under-enforced. Our laws and regulations suffice. Time we gave the regulators the teeth to enforce them with speed and decisiveness.

The author is chairman of CERG Advisory.

omkar(dot)goswami(at)cergindia(dot)com

(Businessworld Issue 27 Jan-02 Feb 2009)