Monday, January 12, 2009

Independent directors and consulting fees

Krishna Palepu, HBS professor who served on Satyam's board, was characterised as 'non-executive' director in 2007-08. Presumably, he could not be called 'independent' director because, in addition to hefty sitting fees and stock options, he collected a huge fee for running training programs for Satyam staff. His total fee came to Rs 92 lakh- not bad even for a HBS prof, eh?

What I would like to know was whether Palepu was inducted originally as 'independent' director. If yes, then he should not have accepted any consulting assignment from Satyam. An 'independent' director is defined as somebody who has not had a pecuniary relationship with the company in the recent past. It would be absurd to construe this to mean that a pecuniary relationship in the present is somehow acceptable.

In the Enron and other scandals, independent directors collecting fees (other than sitting fees) was found to be part of the problem, exactly as auditors doubling as consultants was. I do not know if this practice was outlawed thereafter but certainly there was agreement that this was not consistent with good governance.

Perhaps, the time has come to make the legal position clear: if you are independent director, you cannot collect consulting fees from the company whose board you serve on. For a start, let Sebi write to all companies asking them to disclose if any of their independent directors have had a consulting relationship with them and the fees paid. The list of independent directors involved should be made public.

1 comment:

Anonymous said...

Krishna Palepu should resign from HBS. As a self annointed expert on corporate governance, how can he wash his hands off the controversy claiming that it "happened after he quit"? Shame on him. Yes, the shit hit the fan 8 days after Krishna quit. But, the scam did not occur over these 8 days. It was a sustaining systemic failure, which the independent BOD failed to mitigate or prevent.

Krishna Palepu CANNOT wash his hands off the Satyam Computers controversy. He is a BLOT on the face of this earth. Shame on him.