CORP CORPOR ORAT ATE E GOVE GOVERN RNAN ANCE CE:: SATY SATYAM AM ROLES
AND
RESPONSIBILITIES
OF
INDEPENDENT DIRECTORS
Presented By: Aditya Agrawal (09FT-186) Lalit Gupta (09FT-075) Mahalingam S (09FT-079) Mudit Mishra (09FT-089) Pranab Saikia (09FT-105) Rishabh Jain (09FT-118)
Contents Contents Conten ts.......... ...................... ........................ ....................... ....................... ........................ ....................... .................. ............ .......... .......... .......... ......... ......2 Objective Objecti ve........... ....................... ........................ ....................... ....................... ........................ ....................... ....................... ........................ ................... ....... 3 Scope ........... ....................... ....................... ....................... ........................ ....................... ....................... ........................ ....................... ................ .......... ........ ... 3 Introduction Introdu ction ........... ...................... ....................... ........................ ....................... ....................... ...................... .............. ......... .......... .......... ......... ......... ..... 3 Clause 49 of listing agreement by SEBI........... SEBI ....................... ........................ ..................... .............. .......... .......... .......... .......4 Board of Directors Directo rs........... ....................... ........................ ....................... ....................... ........................ ....................... ..................... .............. .... 4 Independent Indepe ndent Director ............ ....................... ....................... ........................ ....................... ....................... ........................ ................. ........ ... 5 Need of an indepe independent ndent director direc tor............ ........................ ....................... ....................... .................... ............. ......... ......... .......... .......6 Current Curre nt scenario in India ........... ...................... ....................... ........................ ....................... ....................... ........................ .................. ........6 A case Study: Satyam Satya m Computer Services Se rvices ........... ...................... ....................... ..................... .............. .......... .......... ........ ... 7 Independent Indepe ndent Directors’ Director s’ Profi Profile le........... ....................... ....................... ....................... ..................... .............. .......... ......... ......... ....... .. 8 Roles of an independent independ ent director directo r............ ....................... ....................... ........................ ....................... .................... .............. ........ ... 9 Recommendation Recommen dations s........... ...................... ....................... ........................ ....................... ....................... ..................... .............. .......... .......... ....... .. 10 Companies Compani es Bill 2009............ ........................ ....................... ....................... ........................ ....................... ................ .......... .......... .......... ....... .. 11 Bibliography Bibli ography ............ ....................... ....................... ........................ ....................... ....................... ........................ ....................... ................... ............ .... 14
Objective The objective of the study is to discuss the meaning and purpose of corporate governance and its evolution in India. The focus of the study is on the liability of Independent Directors of a company and how it is followed or complied in Indian corporate system. As all these issues have come into limelight after the SATYAM fraud was revealed, this study discusses the liability of Independent Directors with regards to the case
Scope Corporate Governance as a term comprises of many sections and dimensions. The scope of the study is limited to the liability of Independent Directors and its interpretation in India. The study would consider SATYAM as a case study and would discuss the liability of Independent Directors from the facts that emerged out of SATYAM case.
Introduction Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders and also the structure through which objectives of the compan com pany y are set set,, and the mea means ns of att attain aining ing tho those se ob object jective ivess and mon monito itorin ring g per perfor forman mance ce are determined. The focus of corporate governance in India is to impose disclosures and compliance, upgrade corporate governance practices and facilitate the integration of Indian business with their globall coun globa counterpar terparts. ts. After much debate and contr controvers oversy, y, in 2006 Securities Securities and Exchange Board of
India (SEBI) made it mandatory for publicly listed companies to follow the provisions of clause 49 of the listing agreement. Company Compa ny is separ separate ate legal entit entity y distin distinct ct from its share shareholde holders. rs. The major constituents constituents of a company are its members, who are the ultimate owners and its directors. It is an important feature of the company form of business, that there is a gap between the ownership and control over the affairs of the company. In real sense the members are the owners of a company, but it is being managed by the directors who are elected representatives of its members, because it is absolutely necessary for it to have a human agency called as the Company's board of directors. directors. Directors are a group of people comprising the governing body of a corporation. The shareholders of a corporation hold an election to choose people who have been nominated to direct or manage the corporation as a board. fiduciary iary duty to the corporation. Directors are in The functions of directors involve a fiduc
contro con troll of oth others ers'' pro proper perty ty and the their ir pow powers ers are der derived ived pri primar marily ily fro from m sta statut tute. e. Dir Direct ectors ors are respon res ponsib sible le for det determ ermini ining ng and exe execut cuting ing cor corpor porate ate pol policy icy.. For exa exampl mple, e, the they y mak makee dec decisio isions ns regarding supervision of the entire enterprise and regarding products and services. Directors are bound by certain duties such as the duty to act within the scope of their authority and to exercise due care in the performance of their corporate tasks.
Clause 49 of listing agreement by SEBI The clause 49 of the listing agreement by SEBI deals with corporate governance and lays down various processes and disclosures to be followed by all the companies. It tells about the board composition, compensations, committees and management. It lays down that each company has to submit a quarterly corporate governance report along with a compliance certificate from the auditors to SEBI. This report should be attached to the annual report as well as the fillings to the stock exchanges.
Board of Directors (i) The Board of directors of the company shall have an optimum combination of executive and nonexecutive directors with not less than fifty percent of the board of Directors comprising of nonexecutive directors. (ii) Where the Chairman of the Board is a non-executive director, at least one-third of the Board should comprise of independent directors and in case he is an e xecutive director, at least half of the Board should comprise of independent directors.
Independent Director The expression ‘independent director’ shall mean a non-executive director of the company who: a) Apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director; b) is not related to promoters or persons occupying management positions at t he board level or at one level below the board; c) has not been an executive of the company in the immediately preceding three financial years; d) is not a partner or an executive or was not partner or an executive during the preceding three years, of any of the following: i) the statutory audit firm or the internal audit firm that is associated with the company, and ii) the legal firm(s) and consulting firm(s) that have a material association with the company. e) is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; and f) is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.
Some other requirements are:•
Nominee Nominee directors appointed appointed by an institution institution which has invested in or lent to the company shall be deemed to be independent directors.
•
Independent Directors may have a tenure not exceeding, in the aggregate, a period of nine years, on the Board of a company.
•
All fees/compensation, if any paid to non-executive directors, including independent directors shall be fixed by the Board of Directors and shall require previous approval of shareholders in genera generall meeting meeting.. The shareh sharehold olders ers’’ resolu resolution tion shall shall specif specify y the limits limits for the maximu maximum m number of stock options that can be granted to non-executive directors, including independent directors, in any financial year and in aggregate.
•
Two-th Two-third irdss of the member memberss of audit audit commit committee tee shall shall be indepe independe ndent nt directo directors rs with with the chairman as independent director.
•
Minimum of two independent directors should be present in each meeting of audit committee.
•
The remuneration remuneration committee, which would determine determine the remuneration remuneration packages of the executive directors may comprise of at least three directors, all of whom should be nonexecutive directors, the Chairman of committee being an independent director.
Need of an independent director The Board is a group of individuals appointed by the owners of the company to run the company in the int intere erest st of the stake ho holder lders. s. The represen representat tative ivess on the Board should should run the aff affair airss in a transparent manner to all its stakeholders. A company is a combination of various stake holders such as investors, employees, vendors, customers, governments and society at large. The management of the daily affairs of the company is given to the Board of Directors. It has been observed that the Boards have taken decisions which were against the interests of the shareholders & stakeholders and were beneficial to only a select few. This called for independent members on the Board in the process of adopting fair and transparent business practices.
Current scenario in India In spite of number of provisions provided in Indian laws to preserve the independence of independent directors, in reality, majority of the companies look at it only from the compliance point of view and have made use of number of loop holes to suit it to their needs. In some of the listed companies inde in depe pend nden entt di dire rect ctor orss ar aree re rela lated ted to ea each ch ot othe her. r. So Some me li list sted ed co comp mpan anie iess do no nott ap appo poin intt ne new w independent directors after the resignation of old independent directors on the plea that they are unable to find a suitable person. Some listed companies circumvent the provisions of appointment of indepe ind epend ndent ent dir direct ectors ors under the pre pretex textt tha thatt the there re are no ent entry ry and exit nor norms ms of ind indepe epende ndent nt Direct Dir ectors ors in ter terms ms of age age,, qua qualif lifica icatio tion n etc etc.. Som Somee lis listed ted com compan panies ies tre treat at nom nomine inees es of fin financ ancial ial institutions and government as independent Directors. Currently a single independent director can be simultaneously found to working for more than a dozen companies. Each company generally conducts close to 10 board meetings an year, 2- 4 audit committee meetings and one remuneration committee meeting.
Some companies follow a policy of swapping wherein a director from company A works as an indepe ind epend ndent ent dir direct ector or in com compan pany y B and vice ver versa. sa. Press reports reports ind indica icate te tha thatt in a nu numbe mberr of companies independent directors did not attend a single meeting during the year. Politicians are also
known to interfere in the working of the PSU companies and hence completely tossing around the idea of independent directors. Even the appointment of directors in PSU’s involves hectic lobbying. The concept of independent directors being relatively new in India combined with the large number of listed companies (with numbers increasing each subsequent year) there is also a shortage of credible independent directors. Annual reports of many companies show that Independent Directors only fulfil regulatory requirements but in practice act as rubber-stamp of promoters. Press reports indicate that in a number of companies Independent Directors did not attend a single meeting during the year. In some companies same Independent Directors continued for more than 15 years. Mr. Vijay Mallya, chairman, UB Group is on the Boards of about 51 companies; many of these are listed on stock exchanges. The companies conducted six to ten Board meetings in a year, two to four audit committee meetin mee tings gs and one rem remune unerat ration ion com commit mittee tee.. Som Somee of the pro promin minent ent Ind Indepe epende ndent nt Dire Directo ctors rs thu thuss attended almost 100-150 meetings in a year.
A case Study: Satyam Computer Services Satyam Computer Services Ltd) was founded in 1987 by B Ramalinga Raju. The company offers consulting and information technology (IT) services spanning various sectors, and is listed on the New Ne w Yor York k Stoc Stock k Exc Exchan hange, ge, the Nat Nation ional al Stoc Stock k Exc Exchan hange ge (In (India dia)) and Bo Bomba mbay y Sto Stock ck Exc Exchan hange ge (India). In June 2009, the company unveiled its new brand identity “Mahindra Satyam” subsequent to its takeover by the Mahindra Group’s IT arm, Tech Mahindra.
Facts of the Case: •
Satyam was planning to acquire MAYTAS Properties and MAYTAS Infra.
•
Concerns relating to the deal: o
The unrelated diversification.
o
Why not to stick to core competencies.
o
Why to venture into a risk.
o
There was a potential conflict of interest as Satyam’s top executives had stake in the two companies.
o
The quoted acquisition price was much lower than the consultant’s valuation.
•
The deal was eventually passed by the board in a board meeting held on 16 th December, 2008.
•
The deal could not be met because of huge protest from investors and shareholders.
•
Three independent directors resigned on 29 th December, 2008.
The independent directors of SATYAM were highly distinguished personalities from various fields.
SATYAM won the Golden Peacock Global Award for Excellence in Corporate Governance for 2008 and various others awards. Thus it was expected that the Independent Directors, being people of such high reputation would perform their duties independently and with the highest levels of honesty, skill and competence. By doing so the board increased the faith of shareholders on the board. On the other hand, the independent directors contended that since the company was so highly appreciated for its governance, they never suspected any foul play took placed and believed the things they were being told. Thus, the independent directors were acting as mere stamps for the decisions taken by the executive board. The question which arises here is when each one was so awed by the reputation of the other party, was the board really independent?
Independent Directors’ Profile Mangalam Srinivasan
Dr. Mangalam Srinivasan was appointed to the board of directors in July 1991 as an independent director. She is a management consultant and a visiting professor at several U.S. universities. Dr. Mangalam Srinivasan holds a Ph.D. in technology from George Washington University, a Master of Business Business Administrat Administration ion degree degree (internation (international al finance finance and organizatio organization) n) from the University University of Hawaii, a Master of Arts degree (English) from Presidency College, Madras University and was an Advanced Special Scholar (astronomy and physics) at the University of Maryland. Currently, Dr. Mangalam Srinivasan is an advisor to the Kennedy School of Government, Harvard University, Massachusetts where she is a distinguished fellow. She is a member of the board of directors of Technology Frontiers (I) Pvt Ltd. Vinod K Dham
As a pioneer in the technology industry, Vinod (Vin) Dham is the acknowledged “Father of the Pentium” microprocessor. He successfully executed on his previous fund, NewPath Ventures, and is building NEA-IndoUS Ventures on similar principles. Prior to NewPath Ventures, Vinod was the Chairm Chairman, an, Presiden Presidentt and Chief Chief Execut Executive ive Office Officerr of Silicon Silicon Spice Inc., Inc., which which was acquir acquired ed by Broadcom Corporation.In 1993, Vin was named as one of the top 25 executives in the computer industry in America. In 1999, he was named as one of the top 100 most influential Asian Americans of the decade. In 2000, Vin was appointed to serve on the US President’s Advisory Commission on Asian Americans and Pacific Islanders. Vin has co-authored numerous technical papers and patents. Krishna G. Palepu
Profes Professor sor Palepu Palepu is the Ross Ross Graham Graham Walker Walker Profes Professor sor of Busines Businesss Adminis Administra tratio tion n and Senior Senior Associate Dean for International Development at the Harvard Business School. Prior to assuming his
current administrative position, Professor Palepu held other positions at Harvard Business School, including Senior Associate Dean, Director of Research, and Chair, Accounting and Control Unit. He is currently a member of the board of directors of Dr. Reddy's Laboratories Limited, an Indian company listed on the New York Stock Exchange. Dr. Reddy's Laboratories is a global, vertically integr integrate ated d pharma pharmaceu ceutica ticall compan company. y. Profes Professor sor Palepu Palepu is also also a direct director or of BTM Corpor Corporati ation, on, a management solutions provider focused on converging business with technology. M Rammohan Rao
Prof. M Rammohan Rao, Dean, Indian School of Business was appointed to the board of directors on July 29, 2005 as an independent director. Mr. Rao is recognized internationally for his research and teaching capabilities. As a Research Fellow, Mr. Rao was associated with the International Institute of Manage Managemen ment, t, Scienc Sciencee Center Center,, Berlin Berlin,, German Germany, y, and the Intern Internati ationa onall Center Center for Manage Managemen mentt Sciences, Sciences, Center Center for Operations Operations Research and Econometric Econometrics, s, University University Catholique Catholique de Louvain, Louvain, Belgium. He has also conducted research at the Operations Research Group, United States Steel Corpor Corporatio ation, n, Applie Applied d Resear Research ch Labora Laborator tory, y, Monroe Monroevil ville, le, Pennsy Pennsylva lvania nia.. Mr. Rao has a PhD in Industrial Administration from the Graduate School of Industrial Administration, Carnegie-Mellon University, University, Pittsburgh, Pittsburgh, Pennsylvania, Pennsylvania, USA. He has completed completed two Masters Masters Degrees - Master Master of Science Science in Industrial Industrial Administrat Administration, ion, Carnegie-Mel Carnegie-Mellon lon University, University, Pittsburgh Pittsburgh,, Pennsylvania Pennsylvania,, and Master Master of Engine Engineeri ering ng (Indus (Industria trial), l), Cornel Cornelll Univer Universit sity, y, New York. York. Mr. Rao has won severa severall prestigious awards conferred on him by leading institutions across the world. Mr. Rao also sits on the Boards of Krishna Fabrications Pvt. Ltd., MosChip Semiconductor Technology Ltd., APIDC Venture Capital, Bharat Electronics Limited and Mazagon Docks Limited.
Roles of an independent director The Indian law does not have any specific provision regarding the duties of an independent director. Although clause 49 of the Listing Agreement makes provisions regarding independent Directors, one does not find any specific provision regarding the duties and obligations of an independent Director. The role of independent director is that of a conscience keeper. Generally an independent director is expected to perform the fiduciary duties and the duty to exercise care and skill. They represent divergent viewpoints on issues brought before them. They exercise independent judgment on the issues of strategy, performance and standards of conduct. They should have the courage to ask the uncomfortable questions. They should be able to resist the influences, luring and pressures faced by them. They should be independent in their judgment on the issues of strategy, performance and resources, including key appointments and standards of conduct. They also ensure that proper and
effective monitoring system exists in the company. He must act honestly with a degree of diligence and skill. Broadly the responsibilities of an independent director should include the a)
Duty Du ty to ex exer erci cise se po powe wers rs in acc accor orda danc ncee with with th thee com compa pany ny’s ’s co cons nsti titut tution ion
b)) b
Dut uty y to pr pro omo mote te th thee suc succe cesss of th thee com ompa pany ny
c)
Duty to ex exercise in indep epeendent ju judgme men nt
d)
Duty Du ty to ex exer erci cise se re reas ason onab able le ca care re,, ski skill ll an and d dil dilig igen ence ce
e)
Duty to to av avoid co conflicts of of in interest
f)
Dut uty y not to to ac acce cept pt be bene neffit itss fr fro om th thir ird d par arti ties es
g)
Duty Du ty to dec decla lare re inte intere rest st in pro propo pose sed d tran transa sact ctio ions ns or or arra arrang ngem emen ents ts with with the the
company. h)
Duty Du ty to pr prot otec ectt the the in inte tere rest stss of of min minor orit ity y sha share re ho hold lder erss
But it doesn’t mean the independent directors should be held directly liable for any act or omission. It is not possible for an independent director to check and verify, each and every information presented by the board. It would defeat the motive of independent directors as it will make it difficult for the companies to find the right person who is ready to take the risk. Independent directors cannot be expected to act as investigative agencies. In the absence of grounds for suspicion, a director is justified in trusting officials to perform duties honestly. The independent directors are not expected to personally pers onally go and check bank balan balances ces or the accounts. accounts. It is normal for the audit committee committee and the independent directors to accept the figures presented by the management. It is the responsibility of the board and the internal and external audit agencies to sure that the facts and figures presented are accurate. However if an independent director is directly involved in or responsible for any breach or violation or has wilfully defaulted or has shown gross negligence towards his duties then he can also be held liable.
Recommendations 1. A st stat atem emen entt fr from om the re resi sign gnin ing g di direc recto torr sh shou ould ld be ma mand ndat ated ed by regula regulati tion on so there there is transparency as far as investors and other stakeholders are concerned.
An outcome of the Satyam episode is that it seems to have instilled fear in the minds of independent directors in India. Media reports say that “more than 500 directors have quit the BSE-listed company boards since January 1 this year … citing reasons ranging from ill-health to wor work k pre pressu ssures res”. ”. It is dif difficu ficult lt to est establ ablish ish the cor correc rectt rea reason son.. It wou would ld be bet better ter if
independent directors are more transparent about the specific reasons for their departure than to offer the standard lines.
2. SEBI should nominate independent directors. If they have a right to regulate, then surely they have a right to even suggest the appointment of certain directors.
3. Th Ther eree sh shou ould ld be a li limi mitt on the no. of co comp mpan anie iess on whose whose board board a pe pers rson on can be an independent director. This would make sure that the person spends adequate time in each board. E.g.: Mendu Rammohan Rao, an Independent Director on the Satyam Board, was on the board of 7 companies as Independent Director and on 3 companies’ advisory board.
Companies Bill 2009 provides ides for the requirement requirement of a minimum number of three directors directors in the case of a Clause 132 prov public company, two directors in the case of a private company, and one director in the case of a One Person Company; and a maximum of twelve directors, excluding the directors nominated by the lending institutions. One of the directors shall at least be a person ordinarily resident in India. (182 days in a year). Every listed company should have at least one-third of the total number of directors as independent directors.
132.
(5) “Independent director”, in relation to a company, means a non-executive director Of the company, other than a nominee director,— (a) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience; (b) Who, neither himself nor any of his relatives— (i) has or had any pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or its promoters, or directors amounting to ten per cent. or more of its gross turnover or total income during the two immediately preceding financial years or during the current financial year;
(ii ii)) holds or has held any senior management position, position of a key managerial personnel or is or had been employee of the company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed; (iii iii)) is or has been an employee or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of— ( A A)) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or B)) any legal or a consulting firm that has or had any transaction with the company, its holding, ( B subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm; (iv iv)) holds together with his relatives two per cent or more of the total voting power of the company; or (v) is a Chief Executive or director, by whatever name called, of any nonprofits organisation that receives twenty-five per cent. or more of its income from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or (c) who possesses such other qualifications as may be prescribed. Explanation.—For Explanation .—For the purposes of this section, “nominee director” means a director nominated by any institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, to represent its shareholding. (6 ) An ind indepe epende ndent nt dir directo ectorr sh shall all not be ent entitl itled ed to any rem remune unerat ration ion,, oth other er tha than n sit sitting ting fee, reimbursemen reimbu rsementt of expenses for partic participation ipation in the Board and other meeting meetingss and profit-related profit-related commission and stock options as may be approved by the members.
Every ry pro propos posed ed dir directo ectorr sha shall ll fur furnis nish h his DIN (Di (Direc rector tor Ide Identi ntific ficati ation on Num Number ber), ), a Clause Clau se 133 Eve declaration that he is not disqualified to become a director and a consent to hold office as director before he is appointed. Further in case of independent directors, the Board shall give a report in the General meeting that every independent director appointed fulfils the conditions specified for his appointment.
Clause 154 sub-clause 3 states that at least one independent director, if any, should be present in the
Board Meetings. If not then any decision taken will have to be ratified by at least one independent director.
Clause 158 states that the Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority and at least one director having knowledge of financial management, audit or accounts and the Chairman of an Audit Committee shall be an independent director.
The Remuneration Committee shall consist of non-executive directors as may be appointed by the Board out of which at least one shall be an independent director. The Remuneration Committee shall determine the company’s policies relating to the remuneration of the directors, including including the remun remuneratio eration n and other perqu perquisites isites of the directors, directors, key managerial managerial personnel and such other employees as may be decided by the board.
Bibliography 1. http://mca.gov.in/Ministry/acts_bills.html 2. http://www.nfcgindia.org/library.htm 3. CLA plus plus - Corpo Corporate rate & Busi Busines nesss Law Encyc Encyclop lopedi ediaa
4. www.moneycontrol.com 5. http://www.satyam.com/about/awards_achievements.asp 6. www.thehindubusinessline.com 7. www.financialexpress.com 8. http://www.sebi.gov.in
