However much one may want to avoid saying it, the truth is that a crisis stares publicly-held joint stock capitalism in the face. Take away auditors, and the stock market’s existence becomes shaky. Take away the rating agencies, and the bond market collapses, along with a great many other things as 2008 showed us. Take away independent directors, and the thesis of corporate governance protecting minority interests falls down. And the truth is that you don’t need to take any of these away; they are in place but not doing their job, so the crisis is here anyway.
The argument becomes stronger because Satyam did (or seemed to do) everything by the book. It had a stellar crew of independent directors—the dean of the Indian School of Business, a professor from the Harvard Business School, a former cabinet secretary, and a former director of the Indian Institute of Technology in Delhi. You couldn’t have asked for more or better. Yet all of them were clueless, as their board chairman has now admitted. Satyam also had as statutory auditor perhaps the best and oldest auditing firm in the country, and a global giant to boot. Yet, it failed to spot the simple fact that Rs 5,000 crore were missing. And Satyam was listed in New York—where they don’t accept every wannabe that comes along. So if this is the truth about a company that has the best independent directors, the best auditor, and acceptance of its credentials in New York, one thing becomes clear: those supposed safeguards aren’t safeguards at all.
The truth is that every chief executive knows he can pull the wool over the eyes of his non-executive directors—not for ever, but for long enough. And every chief financial officer knows that there are a great many things that auditors do not catch, or are willing to wink at. As for the rating agencies, the collapse of the western financial system had to do with this one little cornerstone having crumbled. In the IPO business, everyone knows that valuations are done on the basis of that old saw: beauty is in the eyes of the beholder. The truth is that, if you can fool the gatekeepers, many people will be tempted to do just that—even General Electric under Jack Welch was massaging its quarterly profit numbers.
Admittedly, we do not get a Satyam case every day. In the last couple of decades, we have had perhaps a dozen major scandals in which the gatekeepers were asleep on the job, Enron among them. In that same period, you might say, tens of thousands of companies around the world have continued to faithfully report broadly accurate performance numbers—and you would be right to argue therefore that the system has functioned very well for much of the time and in most of the cases.
But what an Enron or a Madoff or a Satyam manage to do is to create system-wide doubt. If the counter-party to a transaction is not what he makes himself out to be, then trust goes and doing business becomes virtually impossible. The backlash therefore will be felt by the very companies that have done much to build the image of Corporate India, Satyam’s contemporaries Wipro, TCS and Infosys. But there will be even larger question marks over the whole of Corporate India—some overseas portfolio investors might choose to look elsewhere.
In short, the entire system of delegated gate-keeping by auditors, rating agencies and the like cannot be trusted. The Anglo-American form of publicly-listed, joint stock capitalism has been thrown a challenge. Would a superior system be the so far discounted European or Japanese version, where it is professional investors (banks, keiretsus) who directly oversee what companies do?
