A few months back I had written a column (?Group therapy advised?, August 13) about the skeletons in Indian business groups that an economic ebb tide may reveal. Resisting the temptation to seize the ?I told you so? moment, I must admit I had never imagined I would have to consider Satyam, lauded internationally for its corporate governance practices, as a case in point.
At the outset, let me reiterate for the sake of full disclosure the already well discussed fact that the dean of ISB, my employer, is one of the independent directors of Satyam.
Much has already been written about the Satyam-Maytas fiasco. Ramalinga Raju has rightly been criticised for trying to betray his shareholders for his family and the board has, deservingly, drawn flak for what appears to be a staggering dereliction of duty. Many commentators have gone on to suggest that the ?independent? directors get paid way too much to be truly independent.
But questions remain. Why did a group of very eminent independent directors approve of the deal that smacks of such obvious corporate misgovernance to almost everyone else? Was it an act of willful complicity or of serious misjudgment? If it was a deliberate pro-Raju conspiracy, why such a clumsy move by experienced men? Why the staggering mis-estimation of the investor reponse? I am as much a fan of a conspiracy theory as the next person, but one does not risk reputation earned over decades of hard work that easily. So I checked with a colleague of mine who is an organisational behavior expert for the literature on the mechanics of group decision-making. The applicability of the findings on the issue was eye-opening for me.
The first finding relates to what is known as ?risky shift?. Groups, on average, make more risky choices in uncertain situations than their members, as individuals, would. Furthermore, positively framed situations (e.g. projections of likely gains) particularly lead to a ?risky shift?. Given that the discussion of the Satyam-Maytas deal is likely to have been positively framed (since the valuation report recommended it), this must have already predisposed the board towards taking the more risky step of approving it, something that the directors individually may not have necessarily done.
Then there is the infamous ?groupthink?. Groups that work together over a period of time (like a board of directors) often produce poorly reasoned decisions. Social pressures and conflict avoidance gain ascendancy over rigorous questioning of alternatives and contradicting opinions are frequently suppressed. The litany of resulting problems pointed out in the literature is quite alarming: ?illusion of invulnerability, collective rationalisation, belief in the inherent morality of the group, stereotypes of out-groups (the investors in this case?), direct pressure on dissenters, individual self-censorship, illusion of unanimity, and self-appointed mindguards?. The outcome? ?…incomplete surveys of alternatives and objectives, failure to examine risks of preferred choice, failure to reappraise initially rejected alternatives, poor information search, selective bias in processing information at hand, and failure to work out contingency plans?.
Finally groups are even more affected by certain biases than individuals, at least as overconfident about their judgment as individuals and tend to escalate commitment to a previously selected course of action to the same degree as individuals. Also, interestingly, in group discussions, members overemphasise the common knowledge they share and downplay the more useful unique information that individual members can bring to the table. Another reason why a corporate governance expert?s hesitant dissent may have been completely overlooked.
Groups of smart people often make disastrous decisions. Organisational experts blame group decision making problems for disasters like Nasa?s Challenger and Columbia space shuttles. It would actually be surprising for a board like Satyam?s, packed with academic luminaries, not to get carried away with the hubris of collective self-righteousness. They do not necessarily have to be ?bought up? by the management to err. This, of course, is no justification of their failure to monitor the Rajus, just a different theory of events.
The takeaway in all this is that internal corporate governance?monitoring by the board?is at the best of times, a flawed mechanism unless a chairman is cognisant of these biases and forces, rather than simply ?encourages?, dissent. External corporate governance, operating through markets is likely to be more effective, though far from perfect.
What we know for a fact in the Satyam affair is that the board unanimously made a decision that institutional investors, nearly unanimously, condemned. Who was ?right? in the matter in an economic judgment sense, we can probably never conclusively tell. The investors saw red when they saw the board approve a deal that enriched the Raju family by hundreds of millions. This is indeed the correct reaction for in matters of governance, companies and their promoters, like Caesar?s wife, must be above suspicion.
?Rajesh Chakrabarti teaches finance at the Indian School of Business, Hyderabad