Satyam India Law Journal A vital issue of Corporate Governance the Satyam scandal brought to light was the

e role of the independent director. Their role was highlighted in the wake of Satyams aborted takeover of the two Maytas infrastructure companies. When Satyam attempted to takeover the two companies, the official explanation was that Satyam wanted to diversify to cover its risks. Several questions went unanswered. Why was it trying to take over an infrastructure company when its peers in the IT market were acquiring companies with similar profiles as themselves? If it was seeking to diversify, why did it choose infrastructure which typically has long term gains and requires heavy capital investment? It is had decided on infrastructure, why did it not choose to go after Unitech, which was available for a similar price and whose portfolio was more balanced? These unanswered questions created such shareholder outrage that the Satyam board completely recanted its decision within a matter of days. This had two repercussions. The first one was that the credibility of the board was lost. Questions were raised as to the speed at which a unanimous decision of the Board was overturned by itself. The second question raised was that given the state of affairs, how independent were the independent directors. To seek answers to the above questions, one must necessarily look into the facts of the case as well as the law that mandates independent directors in India. The list of independent directors on the Satyam board is an extremely impressive one and comprised of distinguished academics like Prof Ramamohan Rao, Dean of the Indian School of Business who was also incidentally the head of Satyams Audit Committee, Professor Krishna Palepu (Professor at the Harvard Business School), Prof. V.S Raju (former Director of two IITs), Mr Vinod Dham (father of the Pentium Chip) as well as eminent persons like Mr T.R Prasad ( a former Union Cabinet Secretary ) . The concept of independent directors first took shape in 2004, when SEBI revised its corporate governance norms on the recommendations of the Narayana Murthy Committee. A key suggestion of this panel was to increase the number of independent directors on the board of a company. Currently it is mandatory that at least one-third of a companys board of directors are independent, if the chairman of the board is a non-executive member. In other cases, independent directors should constitute a minimum of 50 per cent of the board. In addition, Clause 49 of Listing Agreement framed by SEBI incorporates many key features of the Sarbanes-Oxley Act, enacted after a series of accounting scandals in the US like the one that forced Enron into bankruptcy. The question then arises as to what the problem with independence of directors in India is. The answer to this question reveals an interesting scenario in India where one part of the law undoes the effect of the other. This is explained as under. The role of an independent director is not day-to-day management of the company. That is the

job of the Executive Directors. The role of the independent directors in administration is therefore limited. In the context of their independence, three very interesting points come out. Firstly, independent directors are mandated under law i.e. Clause 49 of the Listing Agreement to have no pecuniary relationship with the company. They must have no material association with the company. They should not be related to the promoters or anyone in senior management position from one level below the board. They should not have been an executive of the company or of its audit, consulting or legal firms in the past three financial years. Besides, owning 2 per cent or more of the block of voting shares or being a service provider to the company, would disqualify one from taking up an Independent Directorship in a listed company. Their decisions should be independent of those who have controlling stake in the company and in the overall interest of the company and its stakeholders. However, these Directors still have to be nominated to the Board. This is done de jure by the shareholders but de facto by the other Directors. The shareholders merely confirm the nomination. This makes it possible for people who are known to the Directors to get elected. Their independence thus becomes suspect at the very beginning. Secondly, there is the remuneration factor. By law, the independent directors in a public company are prohibited from getting a salary. An independent director is supposed be compensated by sitting fees and commissions. However, it is argued that where the commission is linked to the companys performance, the very objective of prohibiting such directors from accepting a salary is defeated. Also, the law mandates that directors have to hold a minimum number of shares in the company. Once compensation is linked to a companys profit or share price performance, it is arguable whether this creates a vested interest in ensuring that the companys reported numbers are good since even a hint of financial troubles may cause a fall in the share price resulting in the fall in value of a Directors holdings. Therefore, even as the law on one hand wants to keep up the independent nature of the director, other provisions weaken this very stand. The road ahead: moving beyond Satyam With respect to independence of directors, there have been many suggestion and a few steps taken by the government which should help in ensuring good Corporate Governance. The Companies Bill of 2008 sought to increase the levels of transparency and corporate governance to ensure greater accountability to stakeholders. To this end, the Bill brings in a more stringent definition of an independent director. The new Bill introduces the requirement that independent directors must not receive any remuneration, other than a sitting fee or reimbursement of expenses. However, they may receive profit-related commission or stock options if approved by the members.

In addition, an independent director must, in the opinion of the board, be a person of integrity and possess relevant expertise and experience. The Bill also lays down that if the chairman of a company is a non-executive director, at least one-third of the Board should comprise of independent directors and if the chairman is executive chairman, then the Board should comprise of 50% independent directors. These directors are expected to professionalize corporate management and assist the Board in taking corporate decisions in an objective manner for the benefit of the company and its shareholders. The Bill by clause 132 provides that every listed public company having such paid up capital as may be prescribed should have at least one-third of the total number of directors as Independent Directors. The Central Govt may prescribe the minimum number of independent directors in the case of other public companies and their subsidiaries. Such a director is a non-executive director of integrity and should possess relevant expertise and he or any of his relative should not have any pecuniary relationship with the company more fully described in the aforesaid clause. It is considered that a section of non-executive directors need to be independent in a stricter sense, to counterbalance the natural potential for conflict between the interests of executive directors and shareholders and in view of this very point, the new Bill requires that at least a third of the board is independent, within the definitions set in the Bill; independent directors make up the majority of the audit committee. In addition, the chair of the audit committee must be independent and at least one member of the remuneration committee is independent. This brings the membership of the board of directors in India in line with regulations required by other international markets. To cite an example, to list on the London Stock Exchange there is a requirement that at least a third of the board is made up of independent directors. However, a very interesting point is that the new Bill does not go as far as to eliminate independent directors from benefiting from profit-related commission, something that is forbidden under the UK guidance laws and the Sarbanes Oxley law in the United States.