News

The Satyam Scandal Explained

The global corporate community was flabbergasted and scandalized when the Chairman of Satyam, Mr. Ramalinga Raju resigned on 7th January, 2009 and confessed that he had manipulated the accounts
by $1.47-billion.

Background

“The truth is as old as the hills” opined Mahatma Gandhi, christened the Father of the Nation by Indians. So a company named “Satyam” (Truth, in Sanskrit) inspired trust. The IT boom in India, was fuelled by young, middle-class, educated, budding Indian entrepreneurs and Western firms anxious to outsource to take advantage of high-skill, low-wage worker. This trend created a new breed of businessmen for the 21st century and generated many fortunes literally overnight.

Byrraju Ramalinga Raju- founder and former chairman of Indian IT giant Satyam Computer Services- was one of these new millionaires. The son of a farmer from a middle class family with an American MBA degree and a 1999 Ernst & Young Entrepreneur, Raju started Satyam and worked his way to make the company a top 5 Indian IT firm with clients in 60 countries. Satyam is listed on the New York Stock Exchange (NYSE) and the Bombay Stock Exchange.

Along the way Raju picked up CNBC’s Asian Business Leader – Corporate Citizen Award and 1,000 designer suits, 321 pairs of shoes, 310 belts. The capitalization of Satyam skyrocketed to $9-billion. It consequently crashed by 78% when Raju confessed in January that he had falsified accounts for 6-years and inflated the cash account by over $1-billion.

The Government is now managing Satyam through a new Board. Satyam had fictitious names that diverted $4-million monthly towards the Raju’s “personal wealth” by inflating the number of employees of the company from 40,000 to 53,000; hundreds of acres of land were bought using phony accounts; certificates from HDFC bank confirming deposits were false.

Role of Auditors

There is intense debate about the role of PricewaterhouseCoopers, the external auditors of the company in clearing the accounts of Satyam. Auditors are supposed to have checked, verified cash balances, bank statements, assets with relevant confirmations. Satyam was a large company, not a street store; PricewaterhouseCoopers is a globally reputed firm. Professional accounting bodies and police are currently examining the role of auditors in this incident minutely.

Role of Directors

The Companies Act in India has stringent corporate governance requirements of board members. Yet Raju was able to steer the fabricated accounts through his board members for 6-years! This has bewildered the corporate sector and regulators. At times, the company was holding excessive cash, as per the books. This should have invited questions by board members.

In particular, Independent Directors, who are appointed by shareholders at the behest of the board, are selected on the basis of their reputation, knowledge, and wisdom. They are the first defense of minority shareholders. Generally they bring specialized expertise. Independent directors have to meet standards set by stock exchanges too. The Indian Government specifically delineates the role of independent directors in safeguarding the interests of the organization and the shareholders.

It is fair to expect independent directors, like Harvard Professor Krishna Palepu, the former non-executive director of Satyam, to be moral guardians of corporate governance. The role of independent directors in accountability, transparency and governance is also determined by common sense and tradition. However, whilst Independent Directors should steer the company on the right path, ensure compliances, protect minority shareholders, they principally depend on information furnished to them by auditors and lawyers. It is unfair to expect independent directors, meeting monthly or quarterly, to be undercover detectives or cops!

An independent director would normally assume that audited accounts have been rigorously examined. This is more so when an internationally credible firm- like PricewaterhouseCoopers- has audited the numbers. But, they need to still ask the right questions and probe. Sitting on numerous boards compresses the time an independent director has to reflect on what is happening inside the belly of a company.

Lessons

The critical need is to rejuvenate Satyam, through professional managers and/or established promoters who will inject fresh capital and enthusiasm into the business. The Securities and Exchange Board of India (SEBI) can play a pivotal role in this. Time is of the essence. Customers cannot wait for solutions.

Krishna G. Palepu

– Ross Graham Walker Professor of Business Administration
– Senior Associate Dean for International Development
– Previous positions at HBS including Senior Associate Dean, Director of Research, and Chair, Accounting and Control Unit.
– Expert in corporate governance subject whose work has focused on how to make boards more effective, and on improving transparency and disclosure.
– Resigned as a director of Satyam on December 28, 2008- a week and a half before the scandal was uncovered
– Claims he didn’t learn about the fraud in Satyam until after he tendered his resignation
– Says that the growing need of Satyam Board members to spend more time in India was the key driver behind his decision to resign

Quotes

Although I appreciate the opportunity, it is not appropriate for me to talk publicly about Satyam at this time. As you can imagine this is a very complex matter and it is currently under investigation by the legal authorities in India. ÿI would not want to say anything publicly that impedes their work.

For the record, I will say that I am deeply saddened by the fraudulent actions to which Mr. Raju has admitted. ÿHe and his brother have caused Satyam, thousands of Satyam employees, customers and investors, and India enormous damage. During my tenure as an independent, non-executive director of Satyam, I fulfilled my responsibilities fully and appropriately. ÿI am providing my complete co-operation to regulatory agencies as they investigate this matter.
-Professor Palepu

Harvard Business School is proud to count Professor Palepu among its faculty. His contributions to this learning community as a teacher, scholar, and administrator are greatly valued. He is recognized by his colleagues and associates at HBS, who are eager to see him preserve his reputation and good standing in the academic community, as a man of tremendous integrity.

On HBS’s role with regard to the outside activities of its faculty:

HBS faculty participate in a wide range of outside activities, including as directors and trustees of corporate boards and non-profit organizations. Although the School does not monitor the outside activities of the faculty or endorse the companies or organizations they work with, we believe the knowledge they gain and the advice they impart enhances their capacity for scholarship and the learning experience of our students.ÿ
– HBS Communications Office
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February 17, 2009
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