Satyam:India’s Enron?

I am very interested  in Corporate Governance and posted earlier on the Satyam fraud, but here is an article from The Economist.

In The Economist article the reporter wrote:-

The task of rehabilitating corporate India is equally daunting. It has long basked in the reflected glory of its information-technology firms. Run by cerebral, clean-living professionals, they employ India’s brightest youngsters and serve the bluest of blue-chip companies. These digital ambassadors have lent corporate India a certain “mystique”, says Sharmila Gopinath of the Asian Corporate Governance Association (ACGA), based in Hong Kong. But that reputation rests largely on the efforts of one or two companies, such as Infosys, which are impeccably run. Investors delude themselves if they think standards in most Indian technology firms, let alone the rest of its 9,000 listed companies, are close to those set by Infosys.

The problem is assessing standards is very hard. Satyam is India’s Enron. The illusion referred to persists:-

because it is not easy to gauge corporate governance objectively. ACGA’s own 2007 ranking of corporate governance placed India third out of 11 Asian countries, behind Hong Kong and Singapore, but far ahead of China, in ninth place. India’s financial-reporting standards are high, its principal regulator, the Securities and Exchange Board of India, is independent of the government, and its business press is enthusiastic. But enforcement is weak, loopholes large, and shareholder activism is lacklustre. “There is virtually no voting by poll at AGMs”, ACGA notes, “and meetings are often held in remote locations.”

The worthwhile article concludes:-

New laws may matter less than the spirit that animates them. Satyam’s independent directors, for example, met the standards set by the NYSE. But they did not ask hard questions. Directors in India may sit on as many as 15 boards, which leaves them little time to do their job properly.

But even an assertive board and reputed auditors will struggle to stop managers who are determined to hide their dirty laundry from view. About half of the 30 companies in the Sensex, India’s benchmark stockmarket index, are run by business families, most of who trace their roots back to the closed economy of India’s past. “They don’t always understand the new rules,” says Ms Gopinath. “Until investors stand up and say these practices are unacceptable, what reason do companies have to change?”

However, we in NZ should not be too sanguine see for example my posts on Brian Gaynor’s Herald articles on the Securities Commission.