Shishir Prasad, Forbes-Network18.

After much sabre rattling, the independent directors on the board of Satyam Computer Services have done the predictable: jumped ship. And nothing could show the ineffectiveness of independent directors than the stock price of the company. It moved up after names as distinguished as Vinod Dham, Krishna Palepu, Rammohan Rao and Mangalam Srinivasan quit!

In this situation where the minority shareholder—actually in Satyam everybody is one!—has taken a brutal beating over the last two weeks, action by independent directors was the best hope. “Had even one independent director stood up and said he wanted a special board meeting and where he had tabled the proposal to look for a new CEO or management then there would have been some hope,” says the head of an international private equity fund. And it was to protect the interests of the smaller shareholder that the concept of independent director was created. Clause 49 of the Listings Agreement of Securities Exchange Board of India (SEBI) lays out guidelines or principles of good corporate governance. One of the stipulations is that your board must be made up of 50% independent directors.

“The concept being, if you are a majority shareholder or a shareholder and a director then you have a conflict of interest. So who protects the minority shareholders? Those with the big shares are already on the board. So you have independent directors, whose only duty and primary duty is to protect the interests of the minority shareholders,” says Rajiv Luthra, Managing Partner, Luthra and Luthra, a law firm.

By resigning, all the directors have left the minority shareholder in the lurch. Since the existing management faces a crisis of confidence from the shareholders—Satyam’s share price has dropped by almost 30% over the last two weeks—there are two ways to remedy this.

In the first case a set of shareholders who hold more than 10% stake can approach the Company Law Board (CLB) and complain that the company is being mismanaged. The CLB after its investigation can replace the existing board and the new board can appoint a new CEO to take the company forward. This is easy in theory but in practice almost impossible. There has been no such precedence where an existing management was thrown out of a company of any repute and size.

The other method involves at least one independent director who is willing to take on the existing management. Under Section 408 of the Companies Act, there are three options available to independent directors if they feel the minority shareholders are being short-changed. First, they can oppose the resolution during the board meeting itself. This Satyam’s independent directors anyway failed to do. Instead, most of them justified the deal. Two, they can raise the matter at a specially convened meeting of the board, and the shareholders. And last, they can approach the CLB and ask them to stop the resolution. All four directors who have quit obviously did not want to exercise the second and the third option.

“Independent directors are certainly a watchdog, if not a bloodhound and are supposed to raise the alarm if the interests of the minority shareholders are not being protected. In this case, the independent directors have not really played their role. I am surprised they have resigned. Resigning doesn’t do anything for those you are supposed to be looking out for. What they should have done, is opposed the resolution—which they didn’t,” says Darius Khambatta, a leading corporate lawyer. And that begs the question: if independent directors really don’t do much, why have them in the first place?

Shishir Prasad is Deputy Editor at the new business magazine to be launched by Network18 in alliance with Forbes, USA. Associate Editor Mitu Jayashankar and Senior Features Writer Shloka Nath contributed to the story.