It?s chilling. The letter Chairman and founder Ramalinga Raju wrote for the annual report of 2007-08, is still on the Satyam website. Giving no indication of the looming crisis, it reads how the Fiscal Year 2008 was ?exceptional? for Satyam ? ?it is heartening to note that we crossed the $2 billion milestone for the year. Net income growth was 40%.? Now we know that that was a pack of lies. And though Raju in his confession letter did mention that the board was unaware of the happenings, it seems like an impossible situation. What followed the fiasco were a spate of resignations by the independent directors. Professor Ashis Bhattacharya, Coordinator, Corporate Governance, IIM-C, points out though the independent directors had no liability but the Satyam issue hurt their reputation severely. ?They may have resigned but that doesn?t absolve them of their responsibility. Their note of dissent is not available to the public? they can?t be mere barking dogs? a company must make use of the collective wisdom of independent directors.?

The big guns

The role and relevance of independent directors is undeniable, what remains questionable is their performance and selection criteria. And issues remain about the value they add. As Manoj Vohra, Director Research, Economist Intelligence Unit points out, ?When a ?marquee? independent director joins a company?s board, he or she implicitly endorses the company?s reputation in the marketplace. Not all independent directors need to be finance, risk or domain experts. But they are expected to question, debate and challenge how companies conduct themselves and engage with stakeholders.?In some cases it has been observed that the selection of independent directors to a large extent is based on personal likes or dislikes of the chairman or executive director.

Professor Meena Galliara, head of Social Enterprise Cell and the Faculty for Corporate Governance, Narsee Monjee Institute of Management and Higher Studies says that according to surveys, independent directors are raking Rs 8-12 lakhs a year per company in commissions alone. Add the sitting fees and the total can be Rs 12-16 lakhs per annum. At present you can be director on the board of 15 listed companies. So you could be richer by almost 2 crores a year. Would you expect an independent director who is dependent on the CEO on this kind of sum for barely a few days work in a year act more independently than an executive directors who earns the same amount for working throughout the year? Additionally there is always a strong feeling that EDs know best what is good for their companies and that independent directors are merely ornamental as they have neither time nor inclination to appreciate the nuts and bolts of business. Independent directors are boardroom intruders to be tolerated to comply with corporate governance regulation, is the general opinion.

Galliara also points out how this is an ongoing trend globally too. Corporate scandals of ENRON and WorldCom have revealed how this independence has been compromised by a cosy relationship between the CEO with the independent directors. The chairman of the audit committee of ENRON was no less a person than the Dean of Stanford Business School. Yet he could not spot the murky deals in the company. Why did the auditors Arthur Andersen allow the deception to continue for so long?

In both cases the independence was compromised by expectation of excessive rewards. These rewards are often subtle and offered over a period of time. They can include donations to a director?s favourite charity, provision of desirable business or social connections and investment opportunities. In the case of Enron, executives at Merrill Lynch were co-opted into Enron?s efforts to distort the company accounts by the prospect of large fees and a closer relationship with the board. In HIH, the significant amount of compensation paid to board members was seen as leading to unquestionable endorsement of the CEO and management as a quid pro quo.

The way out

Suprakash Mukhopadhyay, VP and Company Secretary, TCS, believes that both, the management as well as the board have a key role in setting the tone in the organisation and that governance is a key component of that. Post Satyam though, they will need to be more vigilant and play their roles with greater care. More importantly, companies need to be aware about the quality of independent directors that are appointed to the board.

The Satyam fiasco has set the tone for the need for tough action to be taken against defaulters. Pavan Duggal, Advocate, Supreme Court, says that as in India we haven?t yet had a definitive action against any company or its top management in a landmark manner. Most of the individuals believe that you can be on board of various companies and do justice to them. It is time that exposure to criminal consequences should be seriously enforced to bring in the element of fear for fair practices, he maintains.

However, some suggest that an autonomous watchdog can be created for appointing independent directors, eliminating their dependency on the company and it?s CEO. Galliara elaborates, ?A solution to eliminate the cosy relationship between independent directors and their companies can be creating an independent body under the regulator such as Securities and Exchange Commission. As it will be responsible for screening and recruiting independent directors and placing them with listed companies. And as the fees to the independent directors are to be paid by the independent organisation, which could be funded through a levy charged by the regulator from each listed company based on its turnover.

Corporate governance must be credible and clear across borders and well communicated to investors. ?Nearly 85% of board members believe substantial improvements can be made in their collective performances, though fewer than 5% formally measure their total board performances,? reveals Lauro Vives, CEO and Chief Analyst of XMG Inc, Canada. He calls for a public rating systems that could guide investors to evaluate the quality of the board. A Lesson in waiting indeed.