Satyam: Flies in the legal ointment

In the backdrop of the recent scam and debate over corporate governance, Vivek Sadhale, head – Legal of Persistent Systems Ltd. And a veteran in corporate legal matters, talks to Pratima Harigunani of CyberMedia about various legal dimensions like independent director liability, audit committee accountability, regulations like SOX, role of auditors and analysts etc.

There has been a lot of buzz around SOX, which incidentally took shape after the Enron and Worldcom frauds in the US. What's your take on the relevance and future of regulations like SOX in today's scenario, especially for IT companies?

When you look at a fraud of a scale and significance like a Satyam or an Enron, the cost argument becomes irrelevant. SOX, when it was constituted came in within thirty days and emerged as a very hard-hitting law. Yes it comes with costs and obligations. But overall response that SOX garnered was of acceptance, from policy makers as well as Industry. There is no fundamental flaw with SOX.

In India, we should be cognizant of issues that are pertinent here. A small turnover company cannot afford layers of audit. Nor can it hire services of a full time CFO. We need not copy SOX and paste it here without closely looking at the Indian context. More so, because Satyam was 'SOX'able, as it had to comply with those regulations, being listed in the US. Yet it happened.

Talk of impact on IT companies, Indian IT companies unless listed abroad do not directly come under SoX's purview. Having said that, there are companies like Infosys, that adhere to the standards and regulations of respective geographies, in terms of reporting and compliance, no matter where they operate. Ethics and compliance are two different things. You can create laws but beyond that you need something more.

Do such regulations help with better information or more information?

You can tell the company to disclose a number of things and create a deluge of data. The role of analysts becomes important here to make the information usable and dissected for a common person, a normal investor.

In fact, one of the major area under spotlight with SOX like frameworks is that of the conflict of interest dilemma that springs up when we see auditors (or analysts) acting as consultants (or investors respectively) in a different garb with the same company. Your view?

Between auditors and consultants, there needs to be a Chinese wall. They act as auditors in front line and consultants back door. Their role needs to be carefully checked. That's why Andersen got wiped out after Enron. As to rating agencies and analysts, who is monitoring them? They just put up some disclaimers. While we make a big hue and cry over auditors etc in big fraud cases, is anyone asking about the analysts? Where are they? Did they not dig deep with all the information they claim to possess?

How would you assess the role of independent directors that comes under the lens and flak both after a corporate fraud expose?

Talking particularly of independent directors and not executive directors, we have to bear in mind the hands-off nature of their functioning. People henceforth would be reluctant to take up such roles for fear of liabilities. There should be accountability but with some provision for immunity, i.e. where to make him rightfully liable and where not.

More so, in the light that he is seldom hands-on with day-to-day business decisions. So hold him if he signs or overlooks a strategic and high-scale board deal but not if a cheque bounces off or on a wrong TDS filing. His scope of liability should be fairly accounted for.

As to the audit committees, people assume its role similar to that of an auditor but that should not be the case. A committee's job is to set up processes and not to engage in audits. It has lay down internal audit control systems and processes. They should questions both internal and external auditors if correct processes are being followed or not.

On a general note, how does it affect the willingness to act as an independent director, specially in view of the remuneration they get and the expertise-cum-experience that the corporate world needs from such directors?

There are questions coming from this territory now. They are asking now, "Am I doing everything right?" We need to act urgently after such frauds like which has surfaced now, but not as to complicate the system further. There are very less incentives, in terms of pay, almost negligible for such directors.

Across the globe, the role of an independent director is defined as that devoid of any pecuniary relationship with the company. Dig deep and ask what is his incentive then? Today, we need to at least ward off the disincentives. The way to convince better is by making their liabilities clear, which they should not asked to read between the lines.

So, what do you make of the way legal autopsy as being handled in the Satyam episode?

All these agencies, be it MCA (Ministry of Corporate Affairs), SEBI, Police or Serious Fraud Investigation Office, need to work together but we need one enforcement mechanism. That person or set-up should be the single agency with the right to deal with such offences so that there is no confusion, no time delay.

Post Satyam, how do you see the industry and companies impacted in the legal and regulatory ambit of business activity?

The lessons which most companies are taking out are more disclosures, better internal control processes and their adequate checks etc. Companies that follow ethical and good governance practices by their very fabric keep controls even before they are told by the statue. For others, a lot of enforced legal policing won't help till they think that about how the spirit of the law is to be and should be followed.