17 December 2008

Satyam - name and reputation are upside down - 2

Compensation of independent directors
In case you are curious, here is the list of the independent directors of Satyam and what they were paid last year for attending 3 to 4 Board meetings:

Prof. Krishna G Palepu (non-independent but non-executive member) (Harvard Business School)
Compensation: 91,91,000 + 5,000 shares sold at nominal value of Rs. 2 each.

Mr. Vinod K Dham (innovator)
Compensation: 12,40,000 + 5,000 shares sold at nominal value of Rs. 2 each.

Prof. M Rammohan Rao (Dean, Indian School of Business)
Compensation: 13,20,000 + 10,000 shares sold at nominal value of Rs. 2 each.

Mr. V P Rama Rao
Compensation: 1,00,000 + 10,000 shares sold at nominal value of Rs. 2 each.

Dr. (Mrs.) Mangalam Srinivasan
Compensation: 12,80,000 + 5,000 shares sold at nominal value of Rs. 2 each.

Mr. T R Prasad
Compensation: Rs. 12,53,333 + 10,000 shares sold at nominal value of Rs. 2 each.

Prof. V S Raju
Compensation: Rs. 12,53,333 + 10,000 shares sold at nominal value of Rs. 2 each.
(shares valued at its peak at Rs.600 per share and now in the region of Rs. 225 before yesterday's announcement)

Clearly, the independent directors were fed well. Though I have nothing against proper compensation, when independent directors are paid ‘too much’, they would I assume lose any motivation to keep their eyes open at Board meetings and create the right diversity needed to voice their independence.

Audit committee’s role
What about the audit committee, would they have a mandate to vet the process?

The functions of Audit committee include:

1. Oversight of the company’s financial reporting process and disclosure of financial information to ensure that the financial statements are correct, sufficient and credible.

5. Reviewing with the management, performance of statutory and internal auditors, and adequacy of the internal control systems.

Composition of the audit committee
1) Prof. M Rammohan Rao, Chairman
2) Dr. (Mrs.) Mangalam Srinivasan
3) Mr. T R Prasad
4) Prof. V S Raju

Clearly, with spending of the entire cash reserves on a related party transaction by the company - both internal audit and internal control issues would need to be studied. I would be very surprised if the internal audit committee even looked at the transaction. So little information is made available in the public domain, that it is difficult to judge what actually occurred behind closed doors.

Absention in meeting and vote by interested directors
Interestingly the press release about the acquisition does not mention any abstention by the interested directors in the vote on the issue. This is not only in direct conflict with the code of conduct for directors (quoted below) but would also violate the provisions of S.300 of the Companies Act 1956 which prohibits an interested director from participating or voting on an issue where they are interested. My guess is the Board would not have violated the statutory provisions and code of conduct and may have asked the interested directors to walk away ‘please’ so that they could vote 'independently'. However, there is no indication of any factual abstention and if there was a genuine arms length related party transaction with the interested directors abstaining, rather than a lip service exit from the room for two minutes, the official press release/stock exchange disclosure would not be quoting the executive Chairman, (instead of a representative of the independent director) of the company saying:

"The two acquisitions pave the way for accelerated growth in additional geographies and market segments such as ..." said Satyam Chairman and Founder B. Ramalinga Raju.

Incredibly the company release gives the name and designation of Ramalinga Raju in bold.

Satyam Computer Services Limited - Code of Conduct and Ethics for Directors and Associates
The Code of Conduct duties imposed by the Board of directors on themselves is given in this document:
II) Legal, Honest and Ethical Conduct

The directors and associates are required to conduct their duties legally, honestly and ethically, when acting on behalf of the Company or in connection with the Company’s business or operations.

They shall

· Act in the best interests of, and fulfill their fiduciary duties to the stakeholders of the Company;

· Act honestly, fairly, ethically, with integrity and loyalty;

· Conduct themselves in a professional, courteous and respectful manner;

· Act in good faith, with responsibility, due care, competence, diligence and independence;

IV) Conflict of Interest
The policies and procedures under this code requires that the directors and associates of the Company shall avoid any activity or association that creates or appears to create a conflict between the personal interests of the directors and associates and the Company’s business interests.

a) Other employment/assignments: The executive directors and associates of the Company shall devote themselves exclusively to the business of the organization and shall not accept any other work or assignment for remuneration (part-time or otherwise).

The directors and associates are expected to avoid even the appearance of a conflict of interest even if the activity is non-remunerative.

b) Disclosure of interest by director: The directors shall disclose conflicts of interest that directors may have regarding any matters that are placed before the Board, and abstain from discussion and voting on any matter in which the director has or may have a conflict of interest and shall make available to and share with other directors information as may be appropriate to ensure proper conduct and sound operations of the Company.

d) Related parties: The policies and procedures of the Company expect that the directors and associates avoid conduct of business of the Company with their relatives or their significantly associated Companies, firms and other businesses. In case of conflicts, disclosure shall be made to the Board of Directors and its approval shall be obtained before proceeding further.

h) Others: The conflicts of interest that may arise in any other form which at this point of time, may not be practicable to enumerate. In case, any act, transaction or situation raises doubts or questions, the directors or associates must consult the Company’s Head – HR or Compliance Officer.

I think this is a clear case of violation of fiduciary duties by the executive and independent directors of the company and I would go so far as to state that they have violated all three duties imposed upon them as fiduciaries – the duty of care, the duty of diligence and the duty of loyalty.

Please see my main blog for the full post.

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