Under the Scanner

If Kiran Karnik in a candid confession in the Dataquest IT Men of the Year
awards mentioned that he was nothing less than terrified at the prospect of
being on the Satyam Board, he probably had valid reasons. Perhaps more valid, at
least than what Ramalinga Raju did to overstate the financials of Satyam.

Several months down the Satyam saga, one thing is for certainthat Rajus
hardwork (a fraud of that magnitude is no mean task!) has not gone a waste. In
spite of what he did, he ended up doing more good than harm for the country.

Rajus Satyam eye-washer has become a sort of eye-opener for the whole
industry. Amongst many reality checks that followed, the Satyam scam also gifted
the industry the realization of immense need and importance of corporate
governance in this country.

Kiran Karnik and Pramod Bhasin discuss the intricacies of corporate governance

Even though, we havent seen any fireworks on corporate governance since, the
incident at least sparked off a discussion. It at least created a scenario where
the government and the industry bodies like Nasscom woke up to the need of not
only having a regulatory framework in place, but also to promote the culture of
self-regulation.

And the efforts have not fizzled out. The corporate world and the government
alike are collating to define a corporate governance set-up, and the debate is
certainly raising some interesting points. Some of these were pointedly put
under the scanner when Pramod Bhasin engaged Kiran Karnik in a fireside chat on
corporate governance on our awards night.

Breaking the Marriage

Hang on! We arent seeking to adopt the western phenomenon here. This about
the company-auditor marriage that is another once and forever made bond in
India. Its a matter, of course, to find long standing auditor company
relationships here. One of the primary concerns that the corporate governance
debate has raised is that of rotating auditors, and thus, breaking the marriage.

The argument against this is that, with time, auditors develop a level of
familiarity with the company and its nitty-grittys. And that, in a way, is a
favorable thing for a company in most circumstances. Getting new auditors, and
thus, a new set of people every two to three years enhances the risk for a
company as the new auditor will take its time to get acquainted with the
companys compliance framework, risk factors, and set up. And by the time some
familiarity is achieved, it will be time to bring in another auditor.

The second argument, and this is a favorite of the auditing companies, is
that even if there is some sort of colluding in the top management of the
company, its unlikely that the auditor will be able to spot it. Hence, crops up
the disclaimer at the end of every audit report.

Azim Premji makes a point on the term of independent directors

It is another matter that Kiran Karnik thinks that these disclaimers are
hardly fit for any place else but the dustbin! The disclaimers by the auditors
are terrible, he says. Although he agrees, that there is a limit beyond which
an auditor cant do anything, he is of the view that any colluding on the part
of the top management cannot escape the auditor for long. Responsibility of an
auditor is very big. Management can take them for a ride, but not for too long,
he says.

Although the debate of rotating auditors is quite vicious, one thing that the
industry is reaching a consensus on is that at least the partners should be
rotated regularly. Another suggestion that is cropping up from analysts is to
have two auditors instead of one.

Karnik had another point to add, and that was that if the internal auditthat
all the companies dowas to be outsourced as well, it will really help. Internal
audit is often regarded as a dirt cleaning exercise before the external one.
Karnik believes that there is a strong compliance case for bringing in a
third-party.

Wheres Your ID?

No, we arent asking about UIDs yet. We know Mr Nilekani is still on them.
This is about the independent directors of the companies. This is another issue
that has been brought under the scanner by the corporate governance experts.
Having independent directors is more of a formality issue for most
organizations. And this has often made the role and responsibilities of an
independent director problematic.

Thus, the call for these directors for having some sort of a pre-defined
fixed term and some sense of rotation is louder than ever now. However, keeping
the India scenario in mind, there are several issues with this preposition. The
first one is right at the definition levelwhat exactly is independent? How
independent is truly independent? As Bhasin pointed out during the chat- that an
independent director might still be a close friend since the last thirty years!

The other issue is that often the expectations from these directors are
unrealistic. Then there are the practical challenges. As Azim Premji, who was
also present at the awards ceremony pointed outits a challenge, especially
with overseas directors. According to him, the best solution is to decide upon a
reasonable period for a directors term.

Coming back to the basic definition of independent directors, Karnik feels
that not only the definition but the role of these directors also needs a
revamp. The manner of appointment of independent director in India is such that
their real rolethat of protecting the interests of the minority share holders
is often lost. On such fronts, Karnik feels that nomination committee is the
key. For most of the companies having an independent director is equivalent to
putting a friends or a relatives name on paper. This mindset, feel the
experts, needs to change.

A fair and flexible nomination committee is a must to solve the issue of who
do we get on the Board?

The other convention that needs to put into place is that we should not
really put too much onus on the independent directors. To expect the independent
director to go all the way to look at original papers and what the auditors have
been doing, is being a little unfair.

Brand India

So why is it that when something like Satyam happens, it is India that
suffers? While if this is to happen in any other country, the company, rather
than the country is at stake? According to Karnik, that can be partly because of
the frequency here. While these incidents are a regular story globally, in India
they are still a rarity. And thats why they end up making the headlines.

The other reason is that we are still a nascent industry. So anything that
happens here tends to be generalized, since people are still busy analyzing and
predicting the trends here. But primarily, Karnik feels, this is because Indian
companies have done very little to build their own brands. Outside our own
borders, we are perceived as the India brand, and not recognized as separate
companies. So, when a company takes a hit, the whole brand suffers.

The other problem, that is uniquely Indian, is the question of how to create
an environment of integrity within an organization, given that there is little
of integrity without. Thats something that even the Satyam incident hasnt been
able to solve yet. But at least it is in the limelight now. And organizations
are slowly starting to wonder how to tackle the mindset issue.

As Karnik summed up in a couple of words, the first step towards this should
be to obliterate the chalta hai attitude of the Indians. Extremely well put!

Mehak Chawla

mehakc@cybermedia.co.in