Friday, July 8, 2011

Independent directors/auditors-not busines advisors but rats ditching sinking ships

Whether it be Money Matters, SKS Microfinance, Satyam or companies caught in a legal/regulatory tussle, a few things inevitably happens. The auditors resign/refuse to seek reappointment, and so do the independent directors. This was evident during the Money Matters case(top executives of the company were accused of bribing loan sanctioning officials for seeking loan approval of their clients). The scam broke out in Dec-10, and within a month, the statutory auditor AND the independent directors resigned, leaving the others to bear the brunt. Now, I understand that noone like to be associated with failure. But the reason for resigning certainly is not due to professional grounds. If they had tried to bring changes within and failed, then I would understand. But abandoning a scam hit company, at the time it needs third party help the most, is quite unethical, to say the least.

During every corporate governance debate etc, it is alleged that Indian companies are 'family run' and not 'professionally managed'. The hypothesis is that when owners take a back seat leaving the steering to professional management and independent directors, it is best for the company. But, these are the very people who will abandon ship at the first sign of trouble. Right from the junior employees to the senior CEO level guys, they have little invested in jumping ship. No wonder then, that 'seth companies' may prefer loyal employees from their own region/language etc, who will stick with them through thick and thin. Same for independent directors also.

Now, auditors are not really expected to advice the company, except maybe on improving its controls. But independent directors have a fiduciary duty to the shareholders(besides the company itself). At times when promoters are arrested(like Money Matters/Unitech), it gives independent directors a golden opportunity to step up to the plate, take control and prove their worth. But no, the gutless wimps prefer to resign. If like in Satyam, they had acquiesced in the events leading to disaster, then I can understand(they have no moral right to stay on then), but otherwise it is quite timid of them to resign. 
Takeaway: Show me 1 company whose existing  independent directors steered it from crisis to renewed success. The fact that one is hard pressed to think, proves my point.


Sushil said...

"stock markets are supposed to help even prospective investors"

please do not be under this mistaken notion. notice that the existence of p-notes in the indian financial system proves that stock markets exist to provide ROIs to individuals with hot money parked in safe havens and who, otherwise, would have to provide service fees for parking their ill-gotten monies. india is the only market in the world which allows this sort of financial instrument aiding hot money and on top of it, it is exempt from capital gains tax if is brought in via mauritius! you have pummelled independent directors earlier, what about our policy makers?

Anandh Sundar said...

Absolutely correct Mr Sushil.but our policy makers do not make any pretence of working for the public good-while that is the sole purpose of indepenent directors