Prof Parthasarathy on how Indian companies with its family based appointments to leadership positions puts the argument of merit on its head and destroys checks and balances needed to address problems that arise. This article was first published in Kafila.org.

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Industry leaders, CEOs, and Corporate big-wigs have been falling over each other to portray the Satyam scam as an isolated case, as a simple failure of corporate governance. On the other hand critics from the left once again have had a field day with their I told you so condemnation of
capitalist free market economies. There is also a moralistic middle class which blames it on greed pure and simple. The fact that the Indian private sector is largely dominated by family owned and controlled businesses of sundry sizes, that caste, community, gender, and social networks play a
significant role in who gets nominated to top positions within the companies, and how businesses are run, that these have significant implications for corporate governance as well as corporate loot. These are issues that are too dangerous and embarrassing at the same time, and so are conveniently ignored.

An editor of a leading newspaper once remarked that corporate leaders usually came up to him for names to fill top positions in their companies. Their requirements were minimal - that the candidate should preferably be male, not be a Muslim, and should as far as possible be a twice-born. The real reason for corporate Indias opposition to reservations in the private sector is not any great appreciation of merit and efficiency. It is rather the urgent imperative to protect their family inheritances (baap ka maal) and positions (baap ka kursi), so that their incompetence in facing
competition in liberalized markets are not exposed. Even as they have opposed reservations, they have revelled in reserving top positions for their own sons, nephews, brothers, and increasingly sons in law (rarely daughters, sisters, or mothers). However much family and fellow caste members may be groomed and be educationally qualified, the implication of family control for good corporate governance is rarely recognized or acknowledged. India's business leaders are quick to brush aside such concerns suddenly developing a concern for protecting India's culturally different and unique business tradition. This despite the fact that even when the culturally unique great Indian business family splits, the businesses are divided among male (usually male) family members, with no concern for the interests of the business or that of the shareholders who are not even consulted, all presided over and mediated by other business leaders supposedly known for their honesty and integrity.

Not just top executive positions but directorships - including so-called independent ones, are also based on kinship, caste, and community. No one has bothered to ask how so many of Satyam and other companies floated by the family have directors who are Rajus - related by kinship and caste.
How qualified are they to assume these directorships? Immediate and extended family members assuming director positions is widespread among most large corporates in India. Gender does not seem an issue here, as the same men who deny positions in their companies to women from the family, miraculously discover a great deal of merit in them when it comes to appointing them to directorships in various companies. Also, it is interesting as to how many of these independent directors and vice-presidents are ex-bureaucrats usually from twice born castes. The same private sector which criticizes the babudom for lethargy and inefficiency finds dynamism, efficiency and merit once the bureaucrats retire. After all is it not easier to thrive on government contracts than
compete in the free market, and expose ones inefficiencies? And what better way to liaise with the government than to have ex-bureaucrats as directors? Independent directors are also recruited from the academia from the merit conscious IITs and IIMs, and other business schools. In return for the prestige, sitting fees, and retainerships, vice-chancellors, deans and directors only have to look the other way when corporate illegalities are committed, and occasionally call upon these CEO to deliver convocation addresses. For all their adulation of American style free market economy, most industry leaders in India are not just reluctant but strongly oppose corporate governance reforms which would put in place independent boards and CEOs who will have the interests of business, employees and
shareholders in mind, and not the interests of founder and promoter families.

It is not by accident that independent directors, auditors, and CFOs associated with the Satyam scam have pleaded guilty to the lesser but more ignominious charge of incompetence than be arraigned for the higher crime of complicity in financial irregularities. The CFO of Satyam - Vadlamani Srinivas has confessed that he does not pay much attention to the details of the balance sheet, and that he just passes the balance sheets and accounts statements prepared by his assistants. Perhaps the CFO was recruited on the basis of reservation and hence was incompetent and inefficient? He has also stated that PricewaterhouseCoopers the auditors of Satyam never pointed out any deficiencies during their discussions with me. PricewaterhouseCoopers is known for recruiting from the IIMs and other reputed business schools. Is it the IIMs and other business schools that have produced the incompetent auditors employed by the company? Or perhaps
PricewaterhouseCoopers recruited candidates through reservations? One of the independent directors of Satyam was the Dean of the prestigious Indian School of Business which only recruits on the basis of merit. He has been reported as being stunned by the revelations of Ramalinga Raju, and in his resignation statement said that he had absolutely no prior knowledge of the scam. What was he doing then on Satyams board as an independent director? Clearly, owning up to incompetence and ignorance seems a safer step than disturbing the family based governance structures of Indian
companies. How else can private business schools make money through family owned business MDPs?

Satyam, Maytas, and Nagarjuna Finance - the three companies that have been involved in financial irregularities and are on the verge of collapse, are not only run and controlled by members of the Raju clan, but also have several other professional employees and directors who have or have had links with other Raju owned companies and government institutions. Such linkages are not uncommon in the capitalist west, nor is it uncommon in western capitalist countries for such companies to survive or even thrive on government contracts. What is different is that for a company like Maytas with little infrastructure expertise to get huge government contracts, to get these contracts implemented through sub-contractors over a long period, to obtain land at a fraction of the market cost, all these
require the building up of intricately linked caste and political networks over a long period of time. Despite being numerically small, the Rajus have been financially and politically powerful enough to influence whichever government has been in power in Andhra Pradesh. It is not surprising to read newspaper reports talking about members of the Raju community being in despair, or that Ramalinga Raju had a meeting with members of his caste community before confessing to his role in the scam,
or even that his caste fellows have pledged financial support for his legal battles.

Newspapers have also reported on the support for Ramalinga Raju among the villagers who have benefited from the development works undertaken by Satyams philanthropic and charitable arm - the Byrraju Foundation. The enthusiasm of India's big companies for corporate social responsibility in
the form of rural development works belies its criticism even by neo-liberal enthusiasts. On the one hand free market fundamentalists such as Milton Friedman have questioned the ethics of diverting shareholder money for social purposes - a criticism that cannot be easily brushed aside. On the other hand, corporate leaders wishing to attain the status, prestige and power of erstwhile zamindars, have started sundry foundations with shareholder wealth ostensibly in the name of carrying out rural
development activities, but also with the additional objective of finding sinecures for spouses, siblings, children, in-laws and other kin group members. It would be an interesting exercise to find out how many of these foundations are headed and run by spouses and other relatives of CEOs, and
how many of them went through a proper process of recruitment, and were selected on the basis of merit. The ethics of using public money in the form of shareholder wealth for family benefit is not something that concerns even the most progressive of our CEOs and managing directors.

For that matter, how are CEOs and managing directors recruited in Indian companies? Was Ramalinga Raju appointed as CEO of Satyam after a rigorous search, selection, vetting, and recruitment process? Was his son Teja Raju appointed to Maytas on the basis of being the best from among a pool of candidates? Did he have the requisite qualifications and experience in the infrastructure sector to head Maytas?

So long as companies are controlled and run by people occupying top positions and linked through caste, community and social networks, even the best of corporate governance regulations and practices cannot prevent scams and financial regularities. So long as corporate boards are occupied
by family members and caste fellows who have little or no responsibility to shareholders and whose interests are restricted to wealth maximization and retaining positions solely for family members, a thousand, or maybe even a million Satyams will be played out across the country.