There is a close nexus between powerful business families and politicians, which ensures that even policy is bent for private ends.

The Satyam, spectrum and southern mining scandals have left India Inc exposed and naked on corporate governance like never before. From the Ambanis to the Agarwals, Ruias, Jindals, Adanis and others lower down the pecking order, almost no one has emerged smelling of roses. Some are stinking to high heaven. Even the Tatas have had to face awkward questioning on Niira Radia, the lobbyist they hired to level the field for them in the telecom business.

What's gone wrong with corporate governance in India?

Two things mainly. One is the system's inability to separate promoter interests from corporate interests, leading to the shortchanging of minority shareholders. Two, there is a close nexus between powerful business families and politicians, which ensures that even policy is bent for private ends. The 2G and Karnataka mining scandals are exhibits A and B in support of this contention.

When questions were first raised about corporate governance in the early 2000s after a whole host of mid-sized companies disappeared after raising public money or by simply destroying shareholder value through various means, the sickness was diagnosed as being the result of poor oversight at the board level.

A committee under the chairmanship of Naresh Chandra, a former diplomat, was set up to recommend corporate governance standards. His main suggestions included a stronger role for auditors and independent directors, including by paying them better. As Pratip Kar, former Executive Director of market watchdog Sebi told The Economic Times some time back: "Companies cannot expect to pay peanuts and get eminent people to take time out and bring their expertise, experience and independent judgment."

Good companies, thus, tried abolishing bad pay to get better independent directors. Instead of peanuts, they paid cashewnuts. Key result: we now have several score crorepatis as independent directors, according to a study. Among them: Naresh Chandra, author of the corporate governance report.

Chandra raked in a cool Rs 1.87 crore in the year to March 2010 from his directorship on Vedanta Resources, 20 percent more than what he was earning the year before. Among the other crorepatis in the independent directors' club were former bankers Aman Mehta (Rs 1.6 crore) and Nasser Munjee (Rs 1.6 crore), and economist and consultant Omkar Goswami (Rs 1.5 crore).

Did corporate governance improve with all the hype and higher fees? The Satyam scam of 2009 gave the lie to that, since its high-profile board had several independent directors who failed to detect the fraud or even get a whiff of it. Among them: a Harvard don who specialised in talking about corporate governance and the dean of one of India's top management schools.

Now that Satyam is safely out of the way, and everyone is duly chastened about the need for better corporate governance, are we doing any better?

Here's an update: The travails of Satyam's shareholders did not end with the change in management to the Mahindras. Satyam settled with its US shareholders, and dipped into its cash - cash that belonged to all shareholders - to pay off only the US shareholders.

Weren't Indian shareholders duped too? How can they be left out of a settlement, even if Indian laws weren't explicit on this issue? Were Mahindra Satyam's independent directors sleeping again? Didn't the independent directors raise the issue of compensating Indian shareholders at the board level?

Governance, clearly, is not about how much independent directors are paid. TT Ram Mohan, professor of finance and accounting at IIM, Ahmedabad, asked in his blog late last year: "What is an optimal level of payment for board members?" While noting that he didn't have all the answers, he said: "When payments are too low, you can't get good people. When they are too high, you can't expect independence."

Now, with the spectrum, illegal mining, Sahara fund-raising and Reliance insider trading cases coming out of the woodwork, it is obvious that corporate wrongdoing is widespread. Can independent directors really do anything about it?

Or is there another issue? If corporate crime is far more prevalent than we had previously imagined it to be, the issue may be more systemic than we had assumed.

HDFC Chairman Deepak Parekh says good independent directors are being scared away by this fear and what they may get involved in. He told The Times of India that good people are unwilling to join boards as independent directors because their liabilities are not well-defined. "How can an independent director determine what a businessman does to get a licence at some stage?"

The question is extremely relevant when we note that three top executives of Reliance ADAG are in jail for the 2G scam, apart from two promoter-bosses of DB Realty and Unitech. When the guys who are supposed to run the company are themselves caught for wrongdoing-and we have only scratched the tip of the iceberg-what chance do independent directors have of preventing skullduggery just by discussing things in the boardroom? Does corporate governance then need its own version of a Jan Lokpal Bill?

The answer cannot be a straight yes or no, for there is no lack of laws to prevent corporate crimes. Between Sebi, the Company Law Board (CLB), the stock exchanges and the Reserve Bank of India, we have enough regulators and laws to take care of any conceivable fraud. The crux of the problem is the nexus between politicians and businessmen, which makes regulatory roles subservient to political whims and fancies.

For example, there was a clear Congress angle to the Satyam scam, since the company obviously siphoned off funds to seek favours with the Andhra government in contracts and real estate ventures. This is why even though Satyam and its auditors have settled their cases in the US, our cases are nowhere near completion. Last year, promoter B Ramalinga Raju actually got bail and it took the Supreme Court to intervene and send him back in.

The mining scandal exposes big business's links with not only the Yeddyurappa government, but many previous governments and bureaucratic functionaries as well.

The Sahara case-in which the Reserve Bank and Sebi have independently asked the group to wind down its deposit-taking and public money-raising activities-is another case in point. A patently dubious issue of optionally fully convertible debentures (OFCDs) by two Sahara companies was cleared by the Company Law Board (another regulator, which was obviously sleeping on the watch) when Sebi found it completely illegal and detrimental to investor interests. It's still not clear which way the case will go. Meanwhile, Sebi's regulators who handled the Sahara case have all ended their tenures abruptly.

When regulators themselves are thus handicapped, what can poor independent directors do - especially when they are directly paid by the management? In many cases, it is obvious that promoters are determined to conduct business in ways that work against their minority shareholders.

This is what happened with Satyam, where two independent board members, Krishna Palepu of Harvard, and M Rammohan Rao, Dean of the Indian School of Business, were roundly criticised for their failure to catch Raju in the act despite their close association with the company and high personal standards of ethics. Palepu's special focus area was corporate governance.

The common point that emerges is this: whether it is the regulatory watchdogs who are dependent on politicians for tenures or independent directors and auditors who are paid by promoter-dominated managements, the systemic issue is how can they be insulated from their paymasters and made truly independent.

In the case of the regulators, the issue is simple: at the first stage, their selection should be made not by the executive alone, but by a panel that includes politicians (from the executive and the opposition) and independent-minded people with unimpeachable integrity. This is a mix between what the government has proposed for the Lokpal Bill and what Anna Hazare's Jan Lokpal Bill suggests.

In the appointment of independent directors, the best way to do it is by getting minority shareholders to elect one or even all independent directors. After all, what is their job? To protect the interests of shareholders, and especially minority shareholders. The majority shareholders can take care of themselves, since they run the company.

Among other things, there has to be a structural shift in the power equation between majority and minority shareholders in areas related to corporate governance. Corporate law needs to be changed to allow minority shareholders a disproportionate vote on issues relating to independent directors. The directors so elected should be empowered to appoint concurrent special auditors who will independently assess the risks to the company and its governance systems.

This is how it would work: minority shareholders in large companies (this proposal is not for small companies, who would find it too costly) should be able to commission independent audits and consultants to assess the company's performance, its current market standing and potential risks directly without reference to the management. As long as independent directors are directly beholden to promoters and promoter-led boards, there will be no independence.

Some companies, including Infosys, have tried to address the issue by giving independent directors high pay and powers to meet separately to discuss issues concerning the company. This is better than nothing, but high pay is not the issue, independence is.

As Rammohan of IIM, Ahmedabad, says in his blog: "Boards are ineffective not because of lack of knowledge or ability but because independent directors don't have it in them to question and challenge management. It is more rewarding to go along with management than to do otherwise. Remember, directors are beholden to management for giving them lucrative directorships. You can hope to get independence only when other interest groups find a place on the board - institutional investors, employees, minority shareholders."

Quite.