The ongoing Satyam saga has made me very curious about the level of disclosures as well as corporate governance practices that were being followed there. Unlike U.S. public companies, which are required to make certain disclosures of their governance practices, Indian companies have a relatively lower disclosure threshold. Ofcourse, the fact that Satyam has its ADR's listed on the NYSE makes it subject to a few of NYSE listing requirements. These requirements are considerably fewer in number as compared to a U.S. company whose shares are listed on the NYSE.
On a detailed reading of Satyam's latest 20F Annual Financial report (for the year ended March 31, 2008) filed with the SEC in August 2008, I found the following striking oddities:
- None of Satyam's Board Members appear to have any financial experience -accounting or auditing or any other kind of financial expertise. It is no therefore no surprise to see how the CEO could have scammed the entire Board and gotten away with it for so long.
- None of the members of the Board's Audit Committee are financial experts within the meaning of 'financial expert' as laid down by the NYSE. Their review and oversight procedures while acting as members of such a Audit Committee remains a mystery.
- The company does NOT have a corporate governance or a nominating committee. This naturally leads us to question the basis on which Board members were appointed. There might have been a potential conflict of interest or board interlocks which went unsupervised.
- Close to 14% of the external auditor's 2007 remuneration was from "Other Services". There has been no disclosure on the details behind these "Other Services". In order to prevent auditors from performing services that may constitute a conflict of interest, many country's corporate laws or listing standards discourage auditors from performing other services other than financial or tax audits. How does one trust financial statements that have been audited by auditors who could have potential conflicts of interest?
- Only 5 of their 9 Board members were independent outside directors. The other 4 were employee directors. Satyam did not follow the practice of having its non management directors meet independently without the employee directors being present. Total lack of independence in their Board and its functioning indicates weak governance practices and a lack of oversight by independent directors of the Board.
- Audit Fees paid to PricewaterhouseCoopers (PwC) increased from $800 K to over $1 million in 2008. No explanation for such an increase has been provided.
- One of the outside independent directors has been paid a special remuneration of $0.2 million which is far higher than is the norm. This has been supposedly provided for his "professional services". If he is being paid for professional services, doesn't that make him a non independent director?
- The entire non executive board (non-management Board) was paid through commissions. The amount of such commissions is not disclosed nor is the basis of such computation of commissions given. How does a shareholder ensure that these 'independent' directors don't inflate profits to allow them to receive fat commissions?
It will be interesting to see whether and how the new Board at Satyam addresses these issues. With Mr. Deepak Parekh (chairman of HDFC corp.) on its Board, Satyam shareholders and employees can be ensured of an honest and indepth review. The Board's first step of replacing PwC as the auditors has been in the right direction. Given the fact that HDFC has had the same auditors S.B.Billimoria & Co. (member firm Deloitte Touche Tohmatsu) for over 15 years, that maybe one of the shortlisted audit firms for Satyam. Lets wait and watch.