Wednesday, December 17, 2008

Satyam deal is off

I just heard on TV that Satyam has called off its move to invest $1.6bn in two property firms owned by the sons of Satyam chairman B Ramalinga Raju.

Raju and his family own less than 10%of stock in Satyam. The move promised to set off a big storm among the investing community- the share was beaten down by 59% in trading in New York yesterday. I heard a contrite-looking Raju say on TV that the company would not have proposed the deal had they anticipated the adverse investor reaction. That, I am afraid, shows poor judgement.

Poor judgement on Mr Raju's part and also on the part of the board of Satyam which approved the deal. How could the board have even imagined that the company would get away with a deal of this kind? The board's independent directors comprise: M Rammohan Rao (director, Indian School of Business), Vinod Dham(the Silicon valley entrepreneur), T R Prasad (former cabinet secretary) Dr(Mrs)Mangalam Srinivasan ( a retired academic and bureaucrat), and Prof V S Raju (former director, IIT Delhi). It also has HBS prof Krishna Palepu as non-executive director.

The independent directors were paid between Rs 12.1 to Rs 13.2 lakh last year as sitting fee and got between 5000-10,000 stock options. Did the chairman get the board's consent for calling off the deal? Or will the board simply ratify the chairman's decision?

There is no doubt that the Satyam move constitutes a serious corporate governance failure. This should prompt serious thinking on, among other things, the role and appointment of independent directors. I have long argued that such directors should not be appointed by management, they should be appointed by institutional investors and small shareholders.

The controversy will also cast a shadow on the IT sector as a whole. IT companies have been in the forefront when it comes to instituting healthy governance practices. But that was when the going was good. Governance, like character, is tested in times of adversity.It behoves the IT sector to adhere to the highest standards in the difficult times it is going through.


MUMBHAI said...

While your comment on the situation at Satyam and the role of Directors is indeed correct, I dont quiet agree with damning the industry as a whole, I personally have never considered Satyam in the same class as a Infosys or a Wipro or even HCL, Satyam started off as a family owned enterprise the promoters cashed out and have remained on the board ever since no wonder they tried to pull this off...but how does it reflect on the whole industry as your conclusion seems to point a finger at the whole industry...i am unable to grasp the basis of your conclusion could you please add some more examples to support your conclusion

Raj said...

Your point on the role of independent directors is bang on. I didn't see anybody in the media asking these questions.

rammohanpotturi said...

The situation Satyam is into today, is nothing but absolute violation of corporate governance, but unfortunately we do not have a investigative mechanism of highest ethical order to safe gaurd the small investor. Government of India should order a high level enquiry into this whole episode and must book the culprits - independent directors who were supposed to be custodians of share holders with stringent punishment such that incidents of this nature do not re-occur. Unless that is done, people will again come to a conclusion that during adversity corporates can do any thing unilaterlally and go scot free. The shadow of Satyam should not be allowed to fall on other IT companies of India lest we have a gloomy 2009 for all those working and associated in IT.Rammohan Potturi- Hyderabad - INDIA