Professor Krishna Palepu's biography on the Harvard Business School website cites his expertise in corporate governance issues and his path-breaking research on corporate governance scorecards. Of course the irony in this is fairly obvious to anyone that has not been in a coma in the past few weeks. Prof. Palepu was an independent director in Satyam.

An article in Mint dated 29th December quotes Vinod Dham, another independent director in Satyam, calling for the ouster of the chairman of Satyam and how he was up till 2 am for the last board meeting to approve the Maytas acquisition. If the "father of the Pentium chip"'s excuse for the bad decision is sleepiness, it's time to wonder if the Code of Conduct for company directors should include recommended timings for board meetings!

All this begs the question - who polices the Palepus and the Dhams of Corporate India? Is it enough for companies to have some famous names on the board to show its "independence" and adherence to corporate governance guidelines laid down by SEBI and bag the Golden Peacock award for Corporate Governance (which Satyam did in 2008)?

Let's get something clear - management is about running the business efficiently for shareholders and governance is about policing it and making sure it is indeed run efficiently. While the Satyam-Maytas fiasco is a result of bad management, it also represents a colossal governance failure.

The fact that it is an accepted practice to have a board to govern management in itself suggests the owner-manager conflict that is inherent in the modern structure of a corporation. What do investors do when there is a failure of governance? Who replaces the board?

In freer markets, there is a market mechanism to regulate corporate boards in the form of take-overs, buy-outs etc. Hostile take-overs by its very nature suggest that the company is not being run efficiently for shareholders and the need to change board and/or management is manifested

through this take-over process.

In markets like ours where there are tighter take-over laws, it becomes virtually impossible to remove boards through market mechanism. While this is a wake-up call for regulators to start considering the merits of market take-overs, it is also a call to investors to monitor board compositions and usefulness more strictly.

I believe the Satyam episode will prove to be India's Corporate Governance Waterloo that signals the end of powerful and whimsical managements (ala Napoleon) and sleepy boards. When the dust settles, I believe attractiveness of India as an investment destination will only increase,

considering how successfully the media and investor activism managed to thwart this blatant money-laundering attempt by company management.

Free markets work when there are checks and balances and collapse when the policing process fails. Free media, investor activism, rule of laws etc are very, very important institutions for the functioning of free market capitalism and cannot be created overnight. The Satyam issue may well turn out to be a blessing in disguise for Indian market capitalism, while providing sleepless nights to company promoters akin to Raju who wonder if they are next to be exposed.

(The author is Chief Operating Officer and Head of Research at BNP Paribas Securities. This  was originally published in BNP Paribas' sales daily note.)  

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