Wednesday, December 10, 2014

Satyam case judgement and independent directors

I had a post yesterday on the judgement in the Satyam case in a trial court in Hyderabad. I said it was not clear from media reports what the independent directors were fined for and why Krishna Palepu of HBS was fined Rs 2.66 crore while the other independent directors were fined Rs 20,000 each.

I am still waiting to get my hands on the court judgement. In the meantime, we have a report in BS that sheds some light on the matter:
The court on Monday imposed a fine of Rs 2.6 crore on Palepu for conflict of interest in providing professional services to the company and  remaining on the board of Satyam as an independent director and for failing to get the government's nod for providing professional services. Palepu has to pay the fine within two months.....Palepu was fined by the court as he had received Rs 87 lakh from Satyam towards consultancy fees, while each individual director was paid around Rs 13 lakh for the year 2007, according to Satyam’s annual report.

If the report is correct and the reason for Palepu's attracting a heavier fine is that he helped himself to a consulting fee as independent director, I must say the judgement is very interesting indeed. What the court is saying is that when you get paid by a company for something other than your work as independent director on the board, it creates a conflict of interest. It compromises your independence. And if that is what the court is implying, it has hit the nail on the head.

An independent director is defined as somebody who has not had a pecuniary relationship with the company for a certain number of years before he gets on to the board. Given this definition, it beats me how you can have a pecuniary relationship with the company after you get on to the board. You can collect your fee and commission but not anything else. And yet here we have Palepu, who is said to be a expert on corporate governance, providing consultancy services to Satyam and making a tidy pile. In my view, it was incumbent on other independent directors to have objected to this arrangement if they were aware of it. And the markets regulator, SEBI, should have been alert to such goings-on in companies (as I mention further on, I did raise an alarm at SEBI).

This is a matter that has troubled me for years. How can a so-called independent director earn consulting fee from a company whose board he is sitting on? I happened to be a member of the Primary Markets Advisory Committee of SEBI a few years ago. Deepak Parekh was the Chairman. When we were discussing the issue of corporate governance, I brought up this matter. I argued that we could not allow independent directors to compromise themselves in this way. I asked that SEBI write to listed companies and ask for details of consultancy fee paid to independent directors. Such companies and their directors, I said, needed to be named and shamed.

To my astonishment, my point was brushed aside. It was not even considered fit for further discussion. I heard people say that the sums involved were small, so what was the fuss about? Well, if the sums involved are small, then the independent directors should not been charging them in the first place!

I guess the Satyam judgement- again, going by the BS report- is another instance of the court having to step in where there is an executive or regulatory failure. I hope SEBI wakes up now and does what I asked them to do- collect details of consultancy fee paid to independent directors. After that, it should do two things. One, pass strictures against or issue warnings to the companies and directors concerned. Two, amend clause 49 to make it abundantly clear that independent directors are not supposed to milking the companies whose boards they sit on for personal gain.



8 comments:

Murugavel.J said...

I just remembered that Palepu was on the Board of another Hyderabad company - GTB...and PwC was their auditor .... Mere coincidence ??

T T Ram Mohan said...

Murugavel, Interesting, didn't know that Palepu was connected with GTB.

TTR

Murugavel.J said...

He was on GTB board from 1997 till August 2001 (the period when 'all that had to happen' , happened).

mukesh singh said...

BJP
That is great post. It's very nice.

Anonymous said...

I am wondering, but is it reflection of "Agency problem" ? where shareholders and senior management has divergent interests ?

Anonymous said...

Please do post a copy of the court judgement if you are able to obtain it. Agree with your comments. What is it about the word "Independent" that these people don't understand?

Anonymous said...

A question, as I am not familiar with Indian legal system: is the judgement and fine against Palepu constitute a criminal penalty? How does one judge the seriousness of the penalty? I.e. A felony, a misdemeanor? Or is it more in the nature of a civil penalty, in effect disgorgement of illegally or inappropriately gained compensation?

T T Ram Mohan said...

Last anonymous, I haven't been able to get hold of the judgement in the case, so don't know what the nature of the offence is. On the face of it, it appears to be disgorgement plus penalty.

TTR