CORPORATE DIRECTORSHIPS WERE NEVER A CAKEWALK. IN THE AFTERMATH OF THE SATYAM SCANDAL, IT’S GOT A WHOLE LOT TOUGHER
Being served with an arrest warrant has always been a occupational hazard for a company director. In the past, the warrant would usually be under Section 138 of the Negotiable Instruments Act, which deals with bounced cheques, and most these emminent gentlemen eventually came to take it in their stride. Chartered accountant Bansi Mehta, 74, who is on corporate boards like HDFC, Proctor & Gamble and Sasken, recalls the standard letter he’de prepared for the authorities: “It said that I, as a non-executive director, had no knowledge of the matter since it was not discussed in board meetings. It was a form of moral pressure the system applied on us. Nobody ever actually went to jail in these cases.”
The threat of arrest under the Negotiable Instruments Act did, however, result in independent directors invariably raising one question of company managements at b o a r d meetings: “have you issued any post-dated cheques that m i g h t bounce?” In the aftermath of the Satyam scandal, these directors might feel a sense of deja vu. Instead of discussing growth strategy or social responsibility, they’re back to asking some very basic questions at board meetings again. Like “have revenues actually been realised?” or “have all expenses been booked?” or the worst of them all, “is the cash really there?”.
“Cash in the bank was normally considered to be the least suspiscious part of the balance sheet (before Satyam),” says Shailesh Haribhakti, who is on the boards of companies like ACC, Blue Star and Pantaloon. “Our responsibility is to appoint auditors who can be trusted to do their job. Directors can’t conduct the audit themselves. In fact, compliance matters are supposed to be automated and should take no more than 20% of the board’s time.”
Be that as it may, professional directors are running scared after the Satyam scandal, many of them ready to resign from their boards at the least provocation. Companies, for their part, are paranoid of their directors resigning, since that would send out all the wrong signals in these uncertain times and possibly send their stock prices crashing.
As a chartered accountant, Haribhakti heads the Audit Committee in all the boards he is on, and with a slew of board meetings coming up in February, company managements are in constant touch with him, keen to ensure he has all the information he needs — including bank statements. “Being an independent director is no walk in the park — it’s an onerous job,” he says. “Company managements actually want to be challenged. They want us to suggest ways and means to strengthen their corporate governance.”
RA Shah, managing partner of law firm Crawford Bayley, has always held a large number of directorships, especially in multi-national companies, from the old days when it was customary for a company’s law firm to be represented on the board. He’s on the boards of Godfrey Philips, Colgate, Bombay Dyeing and Wockhardt and at every board meeting he has attended recently, some time has invariably been set aside to discuss Satyam. “The whole episode shows Clause 49 to be a piece of futile over-regulation. Satyam actually capitalised on it, bringing in some fine people on its Board. It even won some awards for corporate governance on this basis,” he says.
Suresh Talwar, 71, holds the national record for the number of directorships. There was a time when the veteran lawyer, formerly with Crawford Bayley and now the managing partner of Talwar Thakore & Associates, was on 80 boards. Now he’s pared it down to a more modest 53, including 17 listed companies like Larsen & Toubro, Biocon and Sonata Software. He estimates these directorships take up 25% of his working time but that figure is likely to increase this year as he attends a series of post-Satyam board meetings in the coming weeks.
“Henceforth, we’ll all have to ask more searching questions, probe deeper,” he says. “If the information presented by the CEO is not satisfactory, we have to call business heads to make presentations. We may have to ask the management to leave the room when we talk to the audit committee. I have had occassions to do that in the past.”
Though he was not on Satyam’s board, Talwar knows the company well, since he was retained by Ramalinga Ranju to help structure its ESOP scheme. His analysis: “The independent directors at Satyam had extra faith in the management. They didn’t study things with the depth and intensity they should have. But then again, what can you do if the CEO and CFO collude to pull the wool over your eyes? Their integrity may be high, but directors sometimes lack the expertise necessary to see through the camouflage.”
Lawyers, chartered accountants, retired CEOs and civil servants have always been favoured by India Inc as independent directors. In Satyam’s case there were no lawyers or accountants, but there were two emminent business school professors. Is there any particular professional background that best suits the job? “The composition of the board should be as diverse as possible,” says Talwar. “But my own experience is that retired CEOs make for excellent independent directors because they know how companies are run.” Mehta, whose firm Bansi S Mehta & Co provides tax consulting services, says, “Chartered accountants are useful on boards because we have technical expertise, but academicians make a contribution too, in terms of their thinking. But in the end, there are really two kinds of independent directors — those who are conscientious and those who are not.”
As a case in point, Mehta recalls a situation many years ago when the HDFC board was discussing a convertible bonds issue and its accountants recommended moving the operation to Delhi because the stamp duty in Maharashtra was considered too high: “HT Parekh finally pointed out that 40% of HDFC’s business was in Maharashtra and the company shouldn’t worry about paying a couple of lakhs extra in stamp duty. That’s corporate governance for you. Sometimes it’s not only about looking after immediate shareholders interests. It’s about doing the right thing.”
Preeti Mehta, partner at the law firm Kanga & Co, is on the board of Hexaware, a mid-cap IT company that was one of the first to disclose a large loss on account of derivative transactions early last year. She was on a special board-level committee that was constituted by the Hexaware management to investigate the episode. “It’s only when a specific problem like this come to light that independent directors are called upon to delve deeper,” she says. “We also raise questions when the management proposes a related party transaction or a change of accounting policy or an unrelated diversification. But it’s very unusual for independent directors to question the audit committee findings, which is probably what the Satyam directors needed to do.”
At the accounting firm of Jayantilal Thakkar & Co, senior partner Dilip Thakkar rues the fact that the present generation of chartered accountants and lawyers do not want to serve as independent directors on company boards.
Thakkar is on the boards of Walchandnagar Industries, Essar Oil and Essar Shipping, and he says: “I tell the young generation that if they don’t take the responsibility, it will go to others who are less equipped. The Satyam scandal would not have happended if it had chartered accountants like me on the board.”
Source: ET, Corporate Dossier, Mumbai
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