Corporate governance is the set of processes, customs, policies, laws and institutions
affecting the way a corporation is directed, administered or controlled.
Corporate governance also includes the relationships among the
many stakeholders involved and the goals for which the corporation is
governed.The principal stakeholders are the shareholders,management
and the board of directors. Other stakeholders include employees,
suppliers, customers, banks and other lenders, regulators, the environment and the community at large.
Corporate governance is a multi-faceted subject. An important theme of corporate
governance is to ensure the accountability of certain individuals in an organization through mechanisms that try to reduce or eliminate the principal-agent problem. A related but separate thread of discussions focus on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders welfare. The perceived quality of a company's corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus how policies and processes are implemented and how people are led.
Besides rattling investor confidence, Satyam Computer Services' fizzled $1.6 billion
acquisition of Maytas Infra and Maytas Properties
has raised the issue of corporate governance for a company which has bagged a number of
excellence awards over the years.
As recently as September 2008, Satyam was awarded the coveted Golden Peacock Global Award for
Excellence in Corporate Governance, an honor bestowed on companies for following best practices.
Late Tuesday, Satyam announced the acquisition of the privately held Maytas Properties for $1.3
billion and increasing its stake in Maytas Infra to 51 per cent for $300 million. However, the
company had to eat humble pie and withdrew its proposal due to strong opposition from shareholders.
The hasty retreat has dealt a severe blow to Satyam's credibility and made it the laughing stock of
the investor fraternity. Analysts said the deal was unethical as it aimed to bail out firms owned by
promoter and chairman Ramalinga Raju's sons. According to them, the company grossly overvalued the real
estate and infrastructure firms(deal worth $300 million), especially at a time when the two sectors were not in a good shape.
"This raises the issue of corporate governance and it will take some time to regain investor confidence.
When the chairman himself is not proactive and confident of his bread-and-butter business, it does not
augur well for the stock. I believe it is time for the company to hire professional management services
just as Bill Gates stepped down from his position as CEO of Microsoft to become chief mentor. Probably,
such a move could help revive investor sentiment," said Chintan Mewar, head of research at Finquest Securities.
Analysts questioned the motives of Satyam's top executives, saying there was a potential conflict of
interest because they hold stakes in both companies.
Chairman Ramalinga Raju and others hold 36 percent in Maytas Infra and 35 percent in Maytas
Properties.
They also said the acquisitions made little sense at a time when technology outsourcing companies
are preserving cash to help weather the global economic slowdown.
Analysts were also not convinced by Raju's argument that the acquisition would help Satyam diversify
its business and tap the growing opportunities in infrastructure and real estate sectors.
Although the company may have no malified intentions in the
acquisition, this is definitely not a good strategic move to enter into a sector like infrastructure,
which is itself in bad shape.
The World Bank's eight year ban (the biggest sanction since 2004 by the bank on a corporate).
Now, questions are being asked about the company's obligation to keep stakeholders and independent directors
informed.
Indeed, there are more skeletons dropping out of Satyam Computer Services' dark cupboard and even independent
directors, who were pledging solidarity with the management on the Maytas deal only a few days ago, are now
turning the other way. The reason being that the World Bank has confirmed its ban on Satyam from bidding for
contracts for eight years starting September 2008.
That Satyam realised revenues of $100 million from World Bank has made the issue all the more material for
investors and stakeholders bringing the issue of governance again to the fore.
Satyam won its first World Bank contract in 2003. The contract ensured $100 million of yearly revenues. Then
allegations of bribery surfaced in 2005 and an eight-year ban became effective from September 2008.
Experts in the industry say that it’s time to take a fresh look at training for board members and a review of
company practices by market regulator SEBI.
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