History is NOT a great teacher of Governance?

These issues are copied from an analysis of the Satyam debacle in India to remind directors and CEOs the possible lessons that can be learnt, in the hope history will not repeat itself.

A few notable issues which lie beneath Satyam’s debacle were:

The Board of Directors were clearly lagging in their financial expertise. Form 20-F filed by the firm in 2008 highlights the issue of lack of ‘Audit Committee Financial Expert’, which was an important requirement from the Securities and Exchange Commission.

The choice of directors serving on Satyam’s board was not remarkable. Four of the six members on the board were purely academicians and had a lack of industrial experience and practical knowledge required for proper stewardship. Two of the directors were over-occupied being serving on eight other company boards.

Sarbanes Oxley Act (SOX) and corporate governance principles prohibits directors of having any direct involvement in firms operations. However, in Satyam’s case many of the directors were participating in the operations of the company as well.
Satyam’s Form 20-F filed in August 2008 states “We do not have a Nominating/Corporate Governance Committee.” This, too, is a glaring departure from “best practices” in global Corporate Governance.
The role of auditors who authenticated Satyam’s accounts is surely questionable. Having auditing services from top ranked auditors/auditing companies do not guarantee avoidance of breach of contract.
The absolute power of majority shareholders would overshadow the concerns and voices of minority shareholders and thus prevent their active participation/vigilance in the firm’s affairs.
The Board members had significant relationships with Satyam Corporation and its Management, which may have contributed to their failure to be more proactive in their oversight.
In Satyam’s case the Board was unduly reliant on auditors. Excess of this reliance and trust on the auditors prevented Board to be proactive and staying vigilant. Within reasonable and appropriate limits reliance on auditors and management is desirable. Beyond reasonable limits this reliance can pose serious issues.
Source: Universal Journal of Industrial and Business Management 3(2): 58-65, 2015

Many of these issues are common to many companies in Sri Lanka even today and some of them can be noted in leading companies. Rules are not working in uplifting the moral and ethical values of businesses in general. Greed and growth are considered more important for businesses. Continuous awareness and education of directors about their fiduciary responsibility may have to be mandated by the SEC to reduce or eliminate any debacles in Sri Lanka.

About surenraj

“Views expressed are my own”
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