Editorial: Satyam’s Lesson

By M H Ahssan

Think public sector, and its need for reform comes to mind automatically. Many questions arise about its apparent kowtowing to vested interests and opacity in decision-making. With the Satyam Computer Services imbroglio, similar doubts can’t but assail the private sector. The IT major’s promoters recently resolved to pour $1.6 billion into buying stakes in two firms — Maytas Properties and Maytas Infra — founded by the Satyam chairman’s sons.

The board of directors concurred, without any compunction about the fact that the sweetheart deal-pushers owned only 8.5 per cent of the IT company. Shareholders’ funds would thus be used to expand into realty, a trade entirely unrelated to Satyam’s business profile.

The fig leaf was that Satyam needed to de-risk by diversifying, given the IT sector gloom. The decision, it was said, didn’t require shareholder approval. With the market backlash that followed, the promoters beat a retreat. But that the Maytas acquisition collapsed can’t undo the damage on various fronts. The software company’s market value has eroded. Satyam stocks suffered severe mauling in New York and Mumbai, reflecting widespread anger in the investor community.

It’s unlikely that investor confidence can be restored any time soon. Without some management overhaul, shareholders have no guarantee against a sequel to the episode. Satyam has reportedly clamped a temporary moratorium on diversification. This suggests that the Maytas buyout backers could live to fight another day.

Arguably, Satyam’s promoters didn’t mess up technically. The firm follows market regulator SEBI’s rule book on an independent board of directors meant to shield shareholder interests. However, shareholders were taken for granted in the ostensible bid to alter Satyam’s risk profile, and their activism set things right. The board of directors, on its part, failed to exercise judgment. Whether or not Satyam wanted to broadbase, the nepotism charge would still stick. As also the charge of disingenuousness, since realty and infrastructure aren’t less impacted by today’s economic downslide than IT.

Sadly, ham-handedness on the part of one of India’s ivy-league companies may rub off on India Inc’s image as a whole. That’s bad news, given the double whammy of the global economic mayhem and Mumbai terror attacks. If business-friendliness is to be projected domestically and overseas, corporate governance must top India Inc’s list of priorities. Following business best practices can’t be reduced to a tightrope-walk on technicalities. It’s a matter of keeping the faith of the larger community.