Governance Lessons from India's Satyam

A close look at the inadequacies in outsourcer Satyam's corporate governance can instruct companies in how not to be global leaders

By Beverly Behan

In September 2008 the World Council for Corporate Governance honored the now-beleaguered Indian outsourcer Satyam with a "Golden Peacock Award" for global excellence in corporate governance. With its honoree now engulfed in scandal, the Council rushed to distance itself from the troubled company by rescinding the award, issuing a press release through the India-based Institute of Directors stating "the award was obtained as a result of non-disclosure of material facts."

Shocking fraud revelations now coming to light would certainly have been unknown some months back. But a closer look at some of the "material facts"—which Golden Peacock judges should have known about at at the time of the award—reveals a company whose governance standards were far from those of a global leader. In fact, in public filings made several weeks prior to the award show, Satyam demonstrated woeful boardroom inadequacies and significant departures from commonly accepted "best practices" in governance. But Satyam won and painted itself in a self-congratulatory light by using Golden Peacock logos and references.

Some of the most modest publicly traded companies are following governance practices far more laudable than those of this "global honoree."

What follows is a breakdown of some of the ways in which Satyam's practices were inadequate:

Board Composition

The lack of financial acumen on the Satyam board is glaring. The company admits in its August 2008 Form 20-F filing with the Securities & Exchange Commission: "We do not have an individual serving on our Audit Committee as an 'Audit Committee Financial Expert' as defined in applicable rules of the Securities & Exchange Commission. This is because our board of directors has determined that no individual audit committee member possesses all the attributes required by the definition 'Audit Committee Financial Expert.'"

Of the six nonmanagement directors serving on the Satyam board, four were academics, one was a former Cabinet Secretary of the Indian government, and only one (Vinod K. Dham) was a former Chairman/CEO of a tech company (he had previously served as vice-president of Intel's Microprocessing Products Group). Two of the independent directors—Vinod K. Dham and T. R. Prasad—are each noted in the 2008 SEC filing as serving on eight boards in addition to Satyam's.

Board Independence

Satyam had a majority of independent directors—barely. Five of the nine directors are listed as "independent of management." Notably, Harvard Business School Professor Krishna Palepu is not among them, likely due to payments of $200,000 a year noted in the filing that he received in professional service fees from the company. Satyam may have divided the roles of chairman and CEO, but the two individuals who served in these roles were brothers and both were members of management. The company had no independent board leadership; the U.K. Combined Code—which the several Britain-based members of the Council should have been patently familiar with—specifies that boards should "appoint one of the independent non-executive directors to be a senior independent director."

Moreover, Satyam's Form 20-F states: "Our non-management directors do not meet periodically without management directors"—contravening a governance best practice mandatory for companies listed on both U.S. exchanges and widely adopted throughout the world. A recent Korn/Ferry board study notes that over 60% of boards in Australasia have adopted the practice of having the board meet regularly without management.

Board Committees

Satyam's Form 20-F filed in August 2008 also states "We do not have a Nominating/Corporate Governance Committee." This, too, is a glaring departure from "best practices" in global governance. Satyam's board structure instead included one committee you don't see every day—the unfortunately named "Investors' Grievance Committee." (A possible foreshadowing of recent events, this committee will no doubt see plenty of activity in the months ahead.)

When unethical executives become intent on defrauding a company, it can be tough for even the most seasoned directors to see through the scam. But what's shocking in the Satyam case is the recognition this company received for its governance even though its board failed to adopt some basic and widespread boardroom best practices, some of which might well have triggered board awareness that something was amiss. Now that the Indian government has dissolved the Satyam board, we can only hope that from the ashes of Satyam's Golden Peacock rises a phoenix of far superior governance that can not only salvage the company but set a truly worthwhile example of how a world class company should be governed.

A spokesperson for the World Council of Corporate Governance indicated that in the future, their awards process would require "deeper scrutiny." Their experience serves as an important lesson to all third parties who grant governance prizes.

Beverly Behan is the managing director of the Board Effectiveness Practice of the Hay Group and co-author of Building Better Boards: A Blueprint for Effective Governance.