The Satyam Fiasco

Topics: Corporate governance, Board of directors, Non-executive director Pages: 15 (5268 words) Published: March 25, 2013
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Independent directors: time to introspect, suspect, respect – an Indian perspective Rashmi Aggarwal
IMT Ghaziabad, Ghaziabad, India
Purpose – The purpose of this paper is to understand the culpability of independent directors (IDs) in a public listed company under clause 49 of the listing agreement of the Securities Exchange Board of India, which, primarily, is the corporate governance mandate in India. Design/methodology/approach – This paper has been developed on the basis of intensive interviews conducted with 16 legal experts working with 50 top listed companies and seven advocates from the Delhi High Court and the Supreme Court of India, literature survey from research papers, bare acts and policy guidelines on corporate governance by the Government of India. Findings – Two contrary opinions are being rendered on the culpability of IDs. The first proposes a strict and absolute penalty on all directors which would deter them from colluding with promoters. The second proposes that IDs should not be tarred with the same brush unless conclusive evidence of collusion is produced. These contrary opinions are herein analyzed and recommendations put forward. Research limitations/implications – The research paper attempts to study only the culpability of IDs. It envisages the appointments of IDs onto boards without deliberation on the issue assuming that these appointments are made in good faith and trust. Originality/value – The research paper attempts to study whether the IDs who are non-executive directors and who do not have a pecuniary relationship with the company actually share a fiduciary relationship with the shareholders and observe the principle of conflict of interest. There are some compelling reasons for them to alienate liabilities given the dramatic effects of financial disarray as in the case of Satyam. Keywords India, Corporate governance, Directors, Boards of directors Paper type Conceptual paper

Independent directors


Introduction Recently, corporations are responsible for generating the majority of world economic activity. The Indian economy has consciously shifted from a controlled one to a market driven one leading to the development of regimes of governance based on trust and confidence. This fiduciary relationship (the relationship of good faith and trust) is based on two broad legal understandings among the stakeholders: (1) contractual obligations; and (2) agency relationship (Som, 2006). The main stakeholders of a company are the shareholders and they entrust directors with the responsibility to oversee the executives who professionally deploy company assets for long-term sustainability and provide a fair return on their investment by protecting them against management expropriation or use of investment capital to finance poor projects. Journal of Indian Business Research Vol. 2 No. 2, 2010 pp. 123-132 q Emerald Group Publishing Limited 1755-4195 DOI 10.1108/17554191011050299

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This system of corporate stewardship works effectively when shareholders have a high level of confidence in their representatives, i.e. the board of directors. To achieve this level of investor confidence, corporate leaders need to create a mechanism that provides greater transparency into their organisations and strengthen corporate governance and corporate performance management The Institute of Company Secretaries of India (1956). The post-Enron debacle in 2002, World com, Qwest, and Global Crossing in the USA and Europe triggered some of the largest insolvencies in corporate history. The Satyam scandal in India raised the issue of good governance, accountability and the voice of shareholder activism like never before. The sharp reaction to this phenomenon of ethical bankruptcy was the Sarbanes Oxley Act, 2002, which made fundamental changes to every aspect of corporate...

References: Cadbury, S.A. (1992), “Code of best practice”, Report of the Committee on Financial Aspects of Corporate Governance, London. Nanda, A. (2006), The Ethics of Professionalism, Harvard Business School, Boston, MA. Som, L. (2006), “Corporate governance codes in India”, EPW, Vol. 30, November, p. 4153.
Independent directors
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The Institute of Company Secretaries of India (1956), Corporate Governance Modules of Best Practices, 7th ed., Indian Company Act, The Institute of Company Secretaries of India, Taxmann Publications, New Delhi, p. 613. About the author Rashmi Aggarwal has been awarded PhD degree in Legal Frame work of the patents – with special reference to medical patents in March 2007 from Law Department, Panjab University, Chandigarh. She is LL.M. in International Law, LLB from the same University. An ardent researcher she has many publications both in national and international journals to her credit. She is presently working as Associate Professor in the area of Economic and Environment Strategy in Institute of Management Technology, Ghaziabad. Rashmi Aggarwal can be contacted at:
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