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Submitted by: Group 4 Chitra Yadav (91076) Neha Mittal (91095) Priyank Chhabra (91098) Shweta Kathuria (91108) Sowmyadeepthi KVN (91111) FMG 18 B
Submitted to: Mr. Jitender Chaudhary Faculty, Business Ethics FORE School of Management, New Delhi
Table of Contents
1. India in the Global Economy, 2003‐2008 .................................................................... 3 2. Emergence of Satyam Computer Services .................................................................. 4 3. Defining Business Ethics .............................................................................................. 5 3.1 Forces That Shape Business Ethics ........................................................................... 7 3.2 Ethical and unethical practices in a corporate environment .................................. 7 4. Satyam Case Revisited .................................................................................................. 8 4.1 What Went Wrong? .................................................................................................... 8 4.2 Time Line ..................................................................................................................... 9 4.3 Dynamics Generated ................................................................................................. 10 4.4 Who is responsible? .................................................................................................. 13 4.5 Why did it happen?................................................................................................... 14 5. Aftermath of Satyam Scandal .................................................................................... 16 5.1 Effects of Satyam Scandal on Various Stakeholders ............................................. 16 6. Ethics in Business ........................................................................................................ 18 6.1 Ethical Dilemmas Faced By Ramalinga Raju ........................................................ 20 6.2 Principles on Which Businesses Must Operate ...................................................... 23 7. Handling of Crisis ....................................................................................................... 24 8. Applicable Regulations ............................................................................................... 30 9. How this could be avoided in future? / Recommendations ..................................... 32 10. Learnings ................................................................................................................... 34 References ........................................................................................................................ 35
1. India in the Global Economy, 2003‐2008
Brazil, Russia, India and China had solidified their place in the global economy. Posited by Goldman Sachs chief economist, Jim O‘Neil, these nations, commonly referred to as the BRIC Nations, were believed to emerge as the four dominant emerging economies of the twenty‐first century. In 2003, they possessed one‐quarter of the world‘s land coverage; approximately 45% of the world‘s population; and a collective gross domestic product of $3.3 trillion. By 2009, these nations nearly tripled their gross domestic product. Together, the BRIC Nations were the largest bloc of emerging national economies within the global economy, outperforming other emerging markets worldwide. By 2025, economists have predicted these four economies would be half the size of the combined G6 (USA, Japan, Britain, German, France and Italy) and, by 2039, could overtake the G6.
Geo‐political risks, increasing income inequality, and structural constraints in these four economies notwithstanding, globalization had contributed significantly to their economic growth. India had benefited immensely. Its gross domestic product (current dollars) had grown at a compound annual growth rate of 14% since 2003. Its population stood at 1.2 billion people, a 2% compound annual growth rate over the last six years. Given its ability to sustain productivity as its population grows in size and skill, India‘s attractiveness as an emerging market was evident. Deregulation policies adopted by the Government of India had led to substantial domestic investment and inflow of foreign capital to this industry. It had drawn nearly $90 billion in foreign direct investment. In the last few years the Information Technology industry in India had grown at an average annual rate of 30%. Exports contributed to around 75% of the total revenue of the IT industry in India. India‘s growth was attributable to its surge in productivity. And, given its favorable demographic trends and further rise in capital formation (accumulation), India‘s influence on the world economy was immediate and widely felt.
It offers information technology (IT) and business process outsourcing (BPO) services spanning various sectors. at a share price of 138. Emergence of Satyam Computer Services Satyam Computer Services. banking and financial services.36. But. By 2003.12 to $0. energy and utilities. and. The company demonstrated an annual compound growth rate of 35% over that period. the worldwide IT services market was estimated at nearly $400 billion. the company was trading at an average trailing EBITDA multiple of 15.08 INR. retail. Satyam‘s stock would peak at 526. From 2003 to 2008.2. Ramalinga Raju. Operating profits averaged 21%. telecommunications and travel. Satyam generated USD $467 million in total sales. The company was formed in 1987 in Hyderbad. The markets major drivers at that point in time were the increased importance of IT services to businesses worldwide. Satyam clearly generated significant corporate growth and shareholder value. Ltd.120 technical associates servicing over 300 customers worldwide. from $0. with an estimated annual compound growth rate of 6.25 INR – a 300% improvement in share price after nearly five years. the company grew measurably. Earnings per share similarly grew. the growing need of IT services providers who could provide a range of services. Over the same period (2003‐2009). was a rising star in the Indian outsourced IT services industry.1 billion. public services and education. At that time. in nearly all financial metrics of interest to investors. the numbers didn’t represent the full picture 4 . The company was a leading star – and a recognizable name – in a global IT marketplace. beginning in January 2003. Finally. manufacturing and diversified industrials. life sciences and healthcare. including: aerospace and defense. The firm began with twenty employees and grew rapidly as a global business.62. the emergence of a high‐quality IT services industry in India and their methodologies. the company had grown to USD $2. By March 2008. at a compound annual growth rate of 40%. Satyam‘s IT services businesses included 13. India by B. the impact of the internet on eBusiness.4%. The external environment in which Satyam operated was indeed beneficial to the company‘s growth.
5 . Making money is not wrong in itself. He claimed that none of the board members had any knowledge of the situation in which the company was placed. company Chairman Ramalinga Raju resigned after notifying board members and the Securities and Exchange Board of India (SEBI) that Satyam's accounts had been falsified. an understated debtors' position of Rs 490 crore (US$106. an accrued interest of Rs 376 crore (US$81. Raju confessed that Satyam's balance sheet of 30 September 2008 contained: inflated figures for cash and bank balances of Rs 5. They apply not only to how the business interacts with the world at large.33 million) (as against Rs 2. The ethics of a particular business can be diverse.040 crore (US$1.59 million) which was non-existent. It is the manner in which some businesses conduct themselves that brings up the question of ethical behavior. let us first of all study about the business ethics in practice.09 billion) as against Rs 5. businesses are interested in making money. Before we go deep into the study of the Satyam case.361 crore (US$1. It could be called capitalism in its purest form. To some people. and that is the bottom line. 3. Defining Business Ethics Business ethics is the behavior that a business adheres to in its daily dealings with the world.On 7 January 2009.91 million) on account of funds was arranged by himself. an understated liability of Rs 1. Many businesses have gained a bad reputation just by being in business.16 billion) reflected in the books.651 crore (US$575.230 crore (US$266. but also to their one-on-one dealings with a single customer.27 million) in the books). Raju claimed in the same letter that neither he nor the managing director had benefited financially from the inflated revenues.
they usually end up being fined. Business ethics should eliminate exploitation. does this make the first company unethical by association? Some people would say yes. A business may be a multi-million seller. There are many factors to consider. including most of the major brands that the public use. it may be up to the public to make sure that a company adheres to correct business ethics. There are many companies that pride themselves in their correct business ethics. but in this competitive world. Money is the major deciding factor. ethical and environmental laws and received fines worth millions. from the sweat shop children who are making sneakers to the coffee serving staff who are being ripped off in wages. If the company is making large amounts of money. and the dollar sign wins. Many companies have broken anti-trust.Good business ethics should be a part of every business. 6 . they are becoming very few and far between. Business ethics can be applied to everything from the trees cut down to make the paper that a business sells to the ramifications of importing coffee from certain countries. can be seen not to think too highly of good business ethics. In the end. Many major brands have been fined millions for breaking ethical business laws. If a company does not adhere to business ethics and breaks the laws. but does it use good business ethics and do people care? There are popular soft drinks and fast food restaurants that have been fined time and time again for unethical behavior. they may not wish to pay too close attention to their ethical behavior. The problem is that the amount of money these companies are making outweighs the fines applied. When a company does business with another that is considered unethical. Billion dollar profits blind the companies to their lack of business ethics. Many global businesses. the first business has a responsibility and it is now a link in the chain of unethical businesses.
b. Moral Development c. c. e. Compliance with rules and regulations Optimum use of company resources Environment free from discrimination and harassment Accounting and reporting Strategic recruitment and selection Enhancing the valuation of an enterprise Community service Integrated Communication and transparency 7 . Founder b. Customers c. Special Interest Groups d. Defining Moments d. History c. h. f. Structure Policies and Rules Code of Ethics Reward System Selection and Training 4. g.2 Ethical and unethical practices in a corporate environment The following are some of the ethical practices that have to be followed by the corporations: a. Organizational Systems a. External Stakeholders a.1 Forces That Shape Business Ethics The following forces do influence a lot in shaping the business ethics of an individual/organization: 1. Government Regulations b.3. b. Ethical Framework 2. Market Forces 3. d. Stories of Development 3. Organizational Culture a. Personal ethics a. d. Beliefs and Values b. e. c.
d. Satyam Case Revisited 4. e. It could also have started off as an attempt to cover up the bad performance in one quarter. Bribery Coercion Undue Influence Insider Trading Tax Evasion Pollution Unfair dealing and discrimination Improper accounting practices 4.Now let us see some of the unethical practices that should be avoided and restrained from in the organizations: a. g. h. f. as stated in his letter to the board and shareholders “What accounted as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. b. Raju a compelled leader to deliver outstanding results. Raju himself. was under pressure to show extraordinary results in order to survive. His rise to stardom in the corporate world coupled with immense pressure to impress investors made Mr.” Another factor was. as the smallest of the big four players.1 What Went Wrong? The scam took place primarily on account of inflated profits and revenues over a period that lasted several years starting in April 1999. The lure of big compensation to members further encouraged such behavior. c. In the words of Mr. Satyam. 8 .
Satyam does not question the company being barred from contracts.040 crore. Dec 16. But Satyam shares plunge 55 percent in trading on the New York Stock Exchange. 2009: Ramalinga Raju resigns. Satyam also appoints Merrill Lynch to review ―strategic options to enhance shareholder value‖. Dec 28.6 billion deal is aborted seven hours later due to a revolt by investors who oppose the takeover. He says the company's cash and bank balance sheet has been inflated and fudged to the tune of Rs 5. Dec 26. resigns following the World Bank‘s critical statements. Other Indian outsourcers rush to assure clients and investors of credibility. Indian IT industry body Nasscom jumps to defend the reputation of the Indian IT industry as a whole. 9 . 2008: Mangalam Srinivasan. from December 29 to January 10.4. however. Dec 25." On the day the stock drops a further 13. an independent director at Satyam. In a statement. or ask for the revocation of the bar. admitting that the company inflated its financial results.Maytas Properties and Maytas Infra. It also does not address the charges under which the World Bank said it was making Satyam ineligible for future contracts. "This is a stand-alone case of failure of corporate governance and it is critical that it be viewed in this light. 2008: The World Bank bars Satyam from doing business with the bank's direct contracts for a period of eight years in one of the most severe penalties by a client against an Indian outsourcing company. the impact is felt even today. Interestingly. 2008: Satyam postpones a board meeting.6 per cent. 2008: Satyam demands an apology and a full explanation from the World Bank for the statements. its lowest in more than four-and-ahalf years. 2008: Satyam Computers announces it is buying a 100 percent stake in two companies owned by chairman Ramalinga Raju's sons . the bank says: "Satyam was declared ineligible for contracts for providing improper benefits to Bank staff and for failing to maintain documentation to support fees charged for its subcontractors. Jan 7. but instead objects to statements made by bank representatives. which the outsourcer said damaged investor confidence. where it is expected to announce a management shake up. The proposed $1.2 Time Line The events of the Satyam scam unfolded in a matter of few days." Nasscom said. The move aims to give the group more time to mull options beyond just a possible share buyback. Dec 23.
But law firms Izard Nobel and Vianale & Vianale file class action suits on behalf of US shareholders.04 billion vs. former president of Nasscom.1 billion reflected in the books An accrued interest of US$77. where it discloses that it is looking at ways to raise funds for the company and keep it afloat during the crisis. and former member of the Securities and Exchange Board of India. Jan 12.11 million in the books For the September quarter(Q2). Achuthan. Parekh.3 Dynamics Generated 1. a revenue of Rs 2. in the first legal actions taken against the management of Satyam in the wake of the fraud. after its former CEO admitted to India's biggest ever financial scandal. Satyam's balance sheet of September 30. 2009: The Indian government steps into the Satyam outsourcing scandal and installs three people to a new board in a bid to salvage the firm. The board is comprised Deepak S. Jan 11. director at the country's National Stock Exchange. contained the following irregularities: Inflated figures for cash and bank balances of US$1. One such method to raise cash could be to ask many of its Triple A-rated clients to make advance payments for services. 2009: The new board at Satyam holds a press conference.38 million on account of funds was arranged by himself An overstated debtors' position of US$100. US$1. 2009: Satyam attempts to placate customers and investors that it can keep the company afloat.46 million which was non‐existent An understated liability of US$253. Jan 8. 4. C. 2008. the executive chairman of home loan lender Housing Development Finance Corporation (HDFC).112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenues) This has resulted in artificial cash and bank balances going up by Rs 588 crore in the mentioned quarter alone 10 . and Kiran Karnik. US$546.700 crore and an operating margin of Rs 649 crore(24 per cent of revenue) as against the actual revenues of Rs 2.94 million vs.
If true.‖ 11 . nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes. this makes Raju‘s confession suspect.2.67 per cent in 2005 14. This fell to 22. including Maytas Properties and Maytas Infra.13 per cent in January 2009 6. Though the precise numbers quoted vary.79 in 2007 8.60 per cent of equity in the company. Executive compensation was raised and huge profits resulted by selling stake at inflated price 5. Company funds were diverted into real estate investment 3.35 per cent in 2004 15. One of the key performance indicators of the company.02 per cent in 2006 8. The more inflated the share values. partly came from the resources generated through these sales. This points to a conscious decision by the promoters to sell shares.65 at the end of September 2008 5. according to observers the stake of the promoters fell sharply after 2001 when they held 25. 17. the more of such assets could be acquired. It is quite possible that the assets built up by the eight other Raju family companies under scrutiny. 2002 20. the earnings per share was able to be retained at a high level consistently for many years 4.74 per cent in 2003.26 per cent by the end of March. since he stated that ―neither myself. which may have been used to acquire assets elsewhere.
‖ for which it had of course paid a huge sum. but that its interest was not in IndiaWorld. reached unmanageable proportions as company operations grew significantly 9. Satyam Infoway‘s position was that it was aware of the claim being made by ASAP Solutions.co. which was the largest private Internet Services Provider in the country at that time.in and the other portals under its banner. As the promoters held a small percentage of equity. into firms the family held tightly. After the news came out.com. pursuing the deal would not have been terribly difficult from the perspective of the Raju family 12. and was the principal beneficiary just as in the AOL deal. thereby exposing the gap 11. an Internet services company managed by U. The gap which started in April 1999. One example was the acquisition in 1999 by group company Satyam Infoway. the owner of IndiaWorld was himself charged with intellectual property violations by his erstwhile employer IndiaWorld. as Satyam would have been able to use Maytas' assets to shore up its own books.7. 8. who showed artificial cash on his books. Money could have been siphoned out through opaque transactions with beneficiaries who were paid sums not warranted by their business profile. The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify a higher level of operations thereby significantly increasing the costs 10.S.com but was ―limited to the URL indiaworld.com and khel. The Satyam deal with Matyas was salvageable. the stock price fell drastically 12 . in which the Raju family held a small stake. Given the stake the Rajus held in Matyas.com that had no clear revenue model. Satyam‘s business strategy did involve unusual transactions. of IndiaWorld Communications. According to reports. But the investors thought it was a brazen attempt to siphon cash out of Satyam. The acquired company operated popular portals such as samachar. and the aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. for a sum of $115 million. There is reason to suspect that this acquisition delivered little to the company.-based ASAP Solutions Inc. Every attempt to eliminate the gap failed. the concern was that poor performance would result in the takeover. had planned to use this nonexistent cash to acquire the two Maytas companies. It could have been saved only if ―the deal had been allowed to go through.‖ Raju. raising questions about the motivation.
In this case. The Board of directors for any company is responsible to question the management and the working of the company. At times. After all. Corporate and Societal. Individual Level Mr.4. 1.4 Who is responsible? The responsibility for a case like Satyam scam to happen is due to people involved in three levels – Individual. Raju could not have done this alone without the confidence of his top management. Ramalinga Raju. Corporate Level The top management of the company should also have been involved to a large extent. who is the master mind behind the Satyam scam is personally responsible for the saga at individual level. many dignitaries were involved as directors. 13 . It is his greed that led him to resort to unethical and illegal behavior 2. but they were a complete failure in acting on their responsibility. Mr. Raju was able to steer the fabricated accounts through his board members for 6-years.
This raises serious questions on the expertise of the evaluation committee and the award itself Government should have been able to detect the manipulation of financial statements through effective policies and regulations 4. Bank of Baroda. as per the books. In this case. many questions have been raised on the collusion of PWC with Mr. assets with relevant confirmations. it means that the bank statement and certificates were forged SEBI in December 2008 gave a clean chit to Satyam in the probe on violation of corporate governance law 3. Individual Factors Greed for money. Raju.5 Why did it happen? The reasons for Satyam scam to happen can be listed as follows 1. verified cash balances. Several articles claim that DSP Merrill Lynch found out immediately (they were apparently approached for help with a merger) that there were serious accounting issues. including professional investors with detailed information and models available to them. bank statements. overshadowing the responsibility to meet fiduciary duties Craving for Power and Prestige Image as a Successful person Overconfidence in his ability to turn things around before they got out of hand 14 . Infact. while PwC found out nothing for years. Societal Level The institutional investor community.the company was holding excessive cash. the same year that the scam came out shortly afterwards. detected the malfeasance Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues.53 crore for the year 2008 as compared to 1 crore paid by Infosys as auditing fees Satyam's banks – ICICI Bank. etc. retail investors ‐‐ none of them. The Auditors are supposed to have checked. PWC could not handle its role effectively. PwC was paid 3. HDFC Bank. This should have invited questions by board members. If the auditors were conned.
Organizational Culture Excessive interest in maintaining stock prices i. net worth. • Rating agencies & investors Fierce competition 15 . and the stock market 4. etc. Organizational Systems Ambitious corporate growth Executive incentives High risk deals that went sour Audit failures‐ Internal & External Weak Independent directors and Audit committee Whistle blower policy not being effective To get eligible for contract criteria like sales.2. Deceptive reporting practices—lack of transparency ESOPs issued to those who prepared fake bills 3. analysts. External Factors Stock market expectations Nature of accounting rules Aggressiveness of investment banks.e short term goals emphasized Low ethical and moral standards by top management Ethics and intentions of founder himself were on a low level in this case Emphasis on impressing stakeholders especially investors. commercial banks. shareholders.
Aftermath of Satyam Scandal Rebuilding Satyam's reputation may be a near-impossible task. financially. "They were stranded in many ways . seeking jobs in other companies.The unfolding scandal surrounding Satyam founder.morally. Impact of Satyam Scandal on H-1B Employees . 5.com reported 16 . and forgery. Credit Suisse suspended its coverage of Satyam. and socially. Criminal charges were brought against Mr. CNN. SAP Pinnacle Award. Satyam's shares fell to 11. Merrill Lynch terminated its engagement with Satyam.80. including: criminal conspiracy. compared to a high of 544 rupees in 2008. many of them put up their resumes. a 23-year-old employee of Satyam. "There are only two things a service firm has. which resulted in fall in share prices of around 100 companies varying between 5-15%. were stripped from the company. E & Y Entrepreneur Award etc.50 rupees on January 10." Following the confession of the Chairman. project cancellations. Satyam shares peaked in 2008 at US$ 29. and PricewaterhouseCoopers came under intense scrutiny and its license to operate may be revoked.5. People can be replaced but reputation is far more difficult to re-establish. hailing from Salem. B. After the Satyam fiasco and the role played by PwC. In the New York Stock Exchange. by March 2009 they were trading around US $1. Raju. breach of trust. legally. their lowest level since March 1998. Apparently fearing that he may lose his job. its people and reputation. Coveted awards won by Satyam and its executive management. Vishwa Venkatesan. investors became wary of those companies who are clients of PwC. such as Golden Peacock Award for Corporate Governance under Risk Management and Compliance Issues. not least for H-1B workers employed by the company. has far-reaching consequences for the IT industry in India and the United States. layoffs and equally bleak prospects of outside employment. Investors lost $2.82 billion in Satyam. allegedly committed suicide in Chennai." Immediately following the news of the fraud.1 Effects of Satyam Scandal on Various Stakeholders Employees of Satyam spent anxious moments and sleepless nights as they faced nonpayment of salaries.10. 2009. Ramalinga Raju.
"Customers were shocked and worried about the project continuity.‖ the government said. Many speculators who had backed the company are now left with shares that cost about Rs. “The admission of fraudulent manipulation of the financial affairs has created an adverse impression in the minds of the trade. 2009 that insurance giant State Farm cancelled its contract with Satyam for IT consulting services. in a difficult situation for a number of reasons. the government has said.800 crore (Rs 78 billion)." Shareholders lost their valuable investments and there was doubt about revival of India as a preferred investment destination. instead of the initial estimate of Rs 7. confidentiality. business and industry across the world. It is possible that other Satyam clients may follow suit.” ―This has also resulted in serious damage to the reputation of Indian Corporate sector and the regulatory mechanism in the eyes of the world. The VC and MD of Mahindra. This leaves Satyam's H-1B employees. in a statement.10 per share. Cisco. Clients of Satyam expressed loss of trust and reviewed their contracts preferring to go with other competitors. and cost overrun.000 crore (Rs 140 billion). 17 ." The sharp fall in the price of Satyam shares also seriously affected investors. Indian Government was worried about its image of the Nation & IT Sector affecting faith to invest or to do business in the county. Telstra and World Bank cancelled contracts with Satyam. the Satyam scandal has caused ―serious damage‖ to India Inc‘s reputation as well as the country‘s regulatory authorities outside. Huge losses to investors aside.on January 19. The Central Bureau of Investigation (CBI) said the loss suffered by investors in the fraud may rise to a whopping Rs 14. Bankers were concerned about recovery of financial and nonfinancial exposure and recalled facilities. said that the development had "resulted in incalculable and unjustifiable damage to Brand India and Brand It in particular. whose services may no longer be required by the company.
Tata group of companies is one company which follows ethical practices. honesty. Ratan Tata the present chairman of Tata group has declined from airline industry because he was told to bribe then minister to enter the business.The Satyam effect has starting spreading its tentacles. There are number of factors that determine the sustainability of an organization. employees. so future generation can meet their needs as well. Some organizations such as Enron. integrity. in the form of trust. Sustainability of an organization will depend on the impact it has on the people. IT (Information Technology) which used to be the Mecca of all jobs is now the outcaste. strategy. respect. These kinds of issues gave rise to the importance of business ethics in business schools all around the world. Sustainable advantage can be defined as the beneficiary element that determine the long term objectives of an organization. Organizations with poor sustainability will fall back as happened in case of Enron and Satyam.Indian Students Shun IT Companies . quality and responsibility. 6. Satyam. support from open market economy. which he claimed to be unethical and against the 18 . political non alignment. and Tyco etc have made false statements in their accounts and cheated both the stakeholders and government. health safety and environment care. It is said that the chief executive officer of Tata is also its chief ethics officer. In present scenario. where objectives would be the economic development that generates wealth and meets the needs of the current generation while saving the environment. gift and donation for social cause. human resource of an organization is considered to be its competitive advantage. Ethical capability of an organization is its duty to do what is right. Ethical companies have social responsibilities which allow them to flourish undiminished and make profit. financial capital etc. Ethical companies not only make profit but also overcome their competitors and other turbulent changes happening throughout the years and have contributed to social welfare. Some of the ethical policies followed by the company include national interest. Students are preferring to take jobs in their core branches rather than move to the dwindling IT sector. and has proved to have a negative impact on the Engineering students. but it will not provide sustainability. which are its ethics. quality product and service and regulatory compliance etc. Ethics in Business Sustainable advantage of an organization can be determined by its ethical capability.
learned and acquired traits which were imposed upon them by life and experience. An organization should produce or make its own ethical cultures. This is the reason why people have great respect for Tata group and their ethical practices and policies have created brand loyalty which has helped them to survive in market even though many competitors came. They play a key role in creating. corporate culture and environment. individual characteristics.policies the group follows. Not all leaders are considered to be perfect in their decision making because each and every decision they make will depend upon the character of person which differ from person to person. Leaders are models and mentors to their followers therefore they follow the path way set by their leaders. Where there are good leaders there will be good ethical practices in business. The CEO should have strong commitment towards ethics and ethical conduct and should give a constant leadership in renewing the values of an organization. Leader is a person who leads the people towards achieving a common goal. The employees of the organization. the general public and the society as well. The organization being ethical will provide certain social responsibilities such as they do not harm the stake holders. "Business that 19 . Business ethics is the application of ethical principle in the organization or business. great or small they arise out of the needs and opportunities of a particular time and place. and follows ethics. His predecessor JRD Tata had set up the first commercial airlines 'Tata Airlines' in India which was later overtaken by the government of India and named it as Indian airlines. but this ethical culture formulated should be drawn from the concept of what is ethical to all and not what is right for the organization itself. It is necessary for the leader to set good examples. maintaining and changing the ethical culture. One such good leader is JRD Tata who set a good example for his successor and they still follow it. So besides being a pioneer in airline industry they were not able to procure it because they felt it would not sustain them and it would bring a bad image for the company. In a large organization the top level managers or CEO are considered to be the executive and supervisory leader. also has to follow the same ethical principles. Leader can be good or bad. strategy and performance. Factors influencing business ethics are leadership. Character of a person includes their inborn talents.
face to face ethics. Apart from that there was 20 . There are three major types of ethical issues that arise in a business they are. Post and Davis). policies. ―Reward or punishment to ethical integrity and moral courage decide the act of an individual. But. We wake up to these values and beliefs each day as they are the ―rules‖ that govern us. it is a complex dimension of personal and corporate life that can lead to higher performance by both business and society.‖ The existence of rules. a cultural perspective all the way to an organization perception. Ethics is not just about morality. Raju. Individual experiences of values and beliefs stem from the personal point of view. The culture at Satyam. Face to face ethical issues happen between the employees of an organization in their day to day organizational life.1 Ethical Dilemmas Faced By Ramalinga Raju An ethical problem cannot be resolved unless it is first recognized as a dilemma. even highly moral individuals may become corrupt. 6. corporate policy ethics and functional area ethics. especially dominated by the board. as it does not follow the standards and policies set by the organization. symbolized such an unethical culture. Corporate policy ethical issues happen in the basic operations of a company. Functional area ethics issues arise at all functional levels of the organization.treat their employees with dignity and integrity reap rewards in the form of high moral and productivity" (Frederic. in the presence of unethical organizational culture and structure. as the smallest of the big four players. Values and ethics are a part of our everyday lives. Satyam. was under pressure to show extraordinary results in order to survive. if unfair pressure is put on employees to deliver an audit report which has been altered or not showing current accounts of the organization would be un ethical. The employees face these ethical conflicts when their personal standards differ from what their job demands. The top level management including the board of directors and CEO's are responsible for ethical practices of the organization. In the case of Mr. For example in the accounting department. job descriptions and cultural norms will discourage individuals from unethical behavior even if they have a feeble moral sense.
Raju had to suppress his own morals and values in favor of the greater good of the company. Raju did was in the upper right hand corner box. After quitting as Satyam's Chairman. truth is sought and those violating the legal. The public confession of fraud by Ramalinga Raju speaks of integrity still left in the individual. ethical. in the end. The board connived with his actions and stood as a blind spectator. Analyzing on this model of ethics dilemma grid. Raju had many ethical dilemmas to face. The fraud finally had to end and the implications were far reaching. 21 . Mr. On the contrary. Raju was looking at his own personal benefit and there was also an intense external pressure to show exceeding good corporate results.The potency of All or Nothing for a stakeholder combined with intense external pressure is a sure fire recipe for an attack on ethics. what Mr. His acceptance of guilt and blame for the whole fiasco shows a bright spot of an otherwise tampered character. perhaps reckless greed." Mr. "I am now prepared to subject myself to the laws of land and face consequences thereof. but his persistent immoral reasoning brought his own demise. But. Upper right hand corner box . his rise to stardom in the corporate world coupled with immense pressure to impress investors made Mr. and societal norms are taken to task. Mr. Raju said. On one hand. The lure of big compensation to members further encouraged such behavior.greed. Raju a compelled leader to deliver outstanding results. causing the brothers to indulge in illegal and unethical activities.
Servant-leadership is a philosophy and practice of leadership. From this perspective.‖ 22 . Raju‘s behavior fell into. Utilitarianism: The idea that the moral worth of an action is determined solely by its usefulness in maximizing utility or minimizing negative utility. even when it runs contrary to his or her own self-interests. Egoism: When a person acts to create the greatest good for himself or herself. The focus is to create the greatest good for the greatest number of people. When the organization and its employees make decisions merely to achieve individual goals (at the expense of others). they lose sight of a larger goal. a leader may be called on to act in the interests of others. Kirk says altruistically. coined and defined by Robert Greenleaf. a person‘s primary purpose is to promote the best interests of others. In Start Trek III: The Search for Spock. You can find people exhibiting this orientation at every level of an organization. ‖Because the needs of the one… outweigh the needs of the many. Spock says ―logic clearly dictates that the needs of the many outweigh the needs of the few.‖ Altruism: The opposite of egoism. In Star Trek II: The Wrath of Khan. This is where Mr.
Being transparent in business 6. 23 . customers. accounting etc) 4. integrity and accountability We can clearly see that these principles were not followed by the leaders and heads in Satyam. Beyond legal obligations – showing high moral responsibility 5. Responsibility to stakeholders 2. Contribution to social and economic development of society 3. Build an organization culture based on honesty. Respecting the law of land (laws related to employees.6. The organization failed to stand on these principles.2 Principles on Which Businesses Must Operate The following are the 6 main principles on which businesses/ organizations should operate in the society so as to maintain good ethical standards and show high ethical values: 1.
Handling of Crisis Following the revelations of fraud and misdemeanour in the financial accounts of Satyam Computers. the reconstituted board appointed Goldman Sachs and Avendus. The government used provisions under Section 388 (B to D) of the Companies Act to push its intent to appoint 10 nominees on the Satyam board. on the assurances of the board. former head of the National Association of Software and Service Companies. got appointed as directors. a former member of the Securities and Exchange Board of India (SEBI). as needed. It is a provision which is used as a last resort. the Indian Ministry of Company Affairs moved swiftly to replace the company‘s Board of Directors. or for breach of trust. and the promoter. malfeasance. even as key clients and employees threatened to jump ship. Mr Deepak Parikh. The new board‘s job was to prevent the unravelling of the company. The government can use the ground that the business is not being run in a prudent manner and the management can cause. along with a host of smaller ones remained. two big clients. Mr Kiran Karnik. regulatory as well as criminal. Mr R. Several investigations. Ultimately. up to 10 members in all. Towards the end of the month. The nominee-directors are immuned to any prosecution and they are not subjected to the requirement that they hold any qualification shares or are liable to retire by rotation. an Indian investment bank. Such a board is independent in nature and the appointment of a new Board of Directors does not mean government acquisition of the company. persistent negligence or default in carrying out their obligations and functions under the law. got arrested. to identify possible strategic investors in the beleaguered company. the IT industry association. Achuthan. Raju. The government‘s nominee-directors will have the powers to appoint new statutory auditors. The government allowed this group to increase the number of directors further. Three professionals.7. were launched by different state and central agencies. The section provides for a change of management in case the existing personnel are found to be guilty of fraud. head of HDFC Bank and Mr C. Cisco and General Electric. The government is empowered to issue directives to the board. or has caused damage to the business. while some of the customers cancelled their contracts. 24 .
it would be difficult for Satyam to do ‗business as usual‘. However. The standard procedure of going through BIFR was completely ruled out. Any merger or takeover would also have to take note of the class action suit in the United States as well as the suit by Upaid in the United Kingdom. New clients may be difficult to come by. the Ministry of Corporate Affairs and the police. The sizeable dressing up of both its revenues as well as financials makes it difficult to value Satyam as a business. employees may look for alternatives and existing order books may vanish. It has claimed that it specialises in enterprise-based solutions. The only explanation for the low revenues earned could be that Satyam was heavily discounting its services to its clients in order to secure orders and clients. and the inter-corporate investments. TN Manoharan and Suryakant Balkrishna Mainak were unanimous from the beginning on certain issues. The collective wisdom was that topmost priority should be given to 25 . It does not have many clients who are billed more than US$100 million a year. There are also issues relating to other companies linked to Satyam such as Maytas Estates and Maytas Infrastructure. suggesting a large number of small clients. Unraveling the transactions and the flow of funds is likely to take considerable time. as the underlying cash is no longer in the business.Issues in front of new Board The company‘s operating margin of three percent now reported appears to be far below industry standards. where margins in the industry are close to 20 percent. and investigations launched by SEBI. Some of these transactions would have to be written off. Tarun Das of CII. even with a new Board in place. First and foremost was that the turn of events should not lead to a government takeover of Satyam. Action Plan The three eminent members of the Board along with the three who joined later. The company‘s September 2008 financials state that it had as many as 690 clients.
the first few days only highlighted the daunting challenges facing them. corporate fiascoes of this nature only led to the companies collapsing like Worldcom. The firefighting was on literally from day one. Government bailouts never work out for a company in the long run. though the temptation was high to go to the government. more so in these times of crises. Even attrition levels were kept to a bare minimum. On the one hand there were media rumors about the veracity of the number of employees (most saying that the reported 53. even in the days of initial handholding of employees. there was no certainty where the next compensation would come from. Employee motivation was another big challenge. As a result. there were enough instances where HRDs of competitors either directly 26 . to boost customer confidence. The immediate focus therefore was on collections of receivables even as the Board members spoke with the US employees assuring them that compensations would be paid even if it takes a few days time. there was the same situation again on January 31. but with collections increasing the crises was again averted. Though there was a verbal understanding between companies through Nasscom not to poach Satyam employees. as the Board realized that US salaries had to be paid by January 15. The two biggest concerns were to retain customer confidence and to maintain and sustain employee motivation. there would not have been much future for the company.000 employees was overblown by at least 40%) and on the other with no money in the coffers. helped Satyam retain most of its workforce through these trying times. Gradually over the next six weeks. So when the board embarked on its Salvage Satyam mission. It was a great company. The assurances from the Board that salaries would be paid regularly till the time a decision was reached. With US salaries being paid fortnightly. Enron or Arthur Andersen.collection of financial receivables that would provide the working capital on which the company could sustain itself till it found a new owner. and no way could Satyam employees be held responsible. the service quality never flagged. and they should maintain those standards. the situation stabilized. we desisted from taking the short cut. The Board made it clear to them that this is not a Satyam scam. delivering high quality of services. Even in the US. with either one failing. but a Raju scam. Therefore. The major problem was that there was no precedence of this scale in India.
more than 1. Another factor that helped the Virtual Pool concept succeed was the excellent training program that thankfully the Raju regime had invested in at Satyam. The paucity of jobs in recessionary times. Most importantly. However. The scenario might have been different if the scam had happened in 2006-07 where many jobs were available. Fortunately. it did not lose that many people that could have crippled any resuscitation effort put into action by the board.000-10. it was found that there were nearly 8.000 of these were already into projects. not many such offers were taken up. Especially in a contracting economy where the immediate need was to drastically cut the wage bill for Satyam to sustain itself in the short term.or through headhunters even created special cells to attract Satyam employees. once they got into projects. Under the Virtual Pool concept. The Board was also able to ensure timely payment of salaries for the large workforce so that they were not unduly inconvenienced. they straightaway started contributing into the company bottomline.000 number was accurate. that the 53. provident funds and health insurances. Therefore. Many were encouraged to work with NGOs too in the meanwhile. at least on the workforce count. While that was not the case. the Board informed those on Board to remain at home with the assurance to call them up immediately as and when required. Therefore despite Satyams specializations in niche areas like engineering services. The fact that Satyam always had a huge bench. it was also found. While the total number of employees not being inflated to divert funds in the name of wages was a big relief. bigger than most of its competitors. had given rise to the apprehension that employee headcount too is grossly inflated. The other big action-point on the Boards agenda was to retain the existing customers. and unerringly led to its 27 . it was paradoxically an Achilles heel for the Board too. they were able to devise the virtual pool to support the large number of workforce already on the bench. what was more reassuring was the commitment to protect their base salaries. Once the initial media hype cooled off. most remained and even before the Tech Mahindra takeover. Actually having a huge bench meant Satyam was giving continuous training to these people and that had actually created wonderful assets of these people.000 people on the bench. turned out to be a blessing in disguise for Satyam. A mass exodus would have obliterated both topline and bottomline. Though some of these people did join other companies.
but now the government has stepped in and all measures are being taken to retrieve the situation. with his Nasscom legacy and experience of dealing with many of these customers. Fortunately. going back to 2001-02 (time of the US ADR). offering their assurance that the show would go on with no drop in quality of services. As a bigger picture. And. What the Board members did in the initial few weeks was to individually speak to each client. there has been a huge fraud. and to some extent to the Ministry of Corporate Affairs. The Board fortunately was able to convince the CBI to deal in this matter with extreme sensitivity so it did not lead to customer exodus. That the Board entrusted to save and rescue Satyam performed its two biggest challenges of retaining employees and customers with aplomb. Even more praiseworthy was its action in not unnecessarily meddling with its affairs. While the two audit firms KPMG and Deloitte were checking the antecedents of each customer as well as each and every transaction quarter-byquarter. not too many thought on these lines. the credit must go largely to the six eminent personalities appointed by the government. It kept its trust on the eminent Board members and their recommendations.early demise. there will be no deterioration or break in delivery of services or QoS. though in the short term the Board was not willing to look beyond immediate Satyam needs. The regulatory investigations on Satyam in the US persuaded a few companies. Karnik. yes. it would have caused immense damage to the reputation of the Indian software services sector. the investigating agencies including CBI too wanted to check whether the customers were genuine or not. It gives rise to the apprehension that something is seriously afoot and its prudent to stay away from investigating agencies. 28 . He personally met about seventy to seventy-five customers with the message that. because of the apprehension of the damage the continuing Satyam association could have on their brand equity. On the government side. and another thing receiving them from CBI. The strategy paid off and hardly any company left at that stage. Another problem faced initially was to verify how many of the customers and the financial deals in place with them were genuine. though they had a proviso of returning when things stabilized under a new owner. yes. The problem was that it was one thing for these companies to receive letters of verification from KPMG or Deloitte. was the preferred negotiator in most cases. to jump ship. the very fact that there was no procrastination in constituting the Board in record time itself was laudable.
they managed to create a solution that was more generic and did not look at Satyams as a one-off case. The decision was taken not to have any bureaucrats on board. Again. Also. Once. Their point of view was not to fall prey to a knee-jerk reaction and look at this as an IT problem. Inc. Thanks to the board. and to instead go for personalities from the finance world who will understand the financial and accounting aspects. More importantly. though none of the board members was supporting that. It also co-ordinated with two top sets of audit firms to check out whatever discrepancies there were in the accounting system and subsequently devise a fresh set of norms and guidelines that would help not just Satyam but also provide a corporate governance guideline for India. was the decision not to accept government financial doles. Some were not comfortable 29 . Another crucial decision at the very beginning was around the composition of the Board. Ex-Chief Justice Sam Bharucha consented to join in and meticulously signed every bid and document in quick time. while the initial clamoring was to have many eminent IT personalities on Board (Satyam being an IT company).Some decisions of the Board stood out: foremost. the situation had stabilized to such an extent that some started questioning the need to sell at all. Again. Even when various potential bidders were informally treading the waters. by March. as their set style of functioning could delay the process. not even retired ones. the board members had to constantly parley with customers to allay their apprehensions. they were able to convince the government not to set a floor price for the sale. They also convinced both SEBI and the Company Law Board against proceeding on any takeover option. Many of them were uncomfortable with an MNC company taking over Satyam. there was the need to have someone to oversee the whole process. In fact. The Board successfully co-ordinated with top sets of legal firms in both India and the US to protect itself against the class action suits threatened in the US and also against many of the SEC regulatory investigations. corporate India now has a blueprint of the course of action to follow in case there is another such incident. the board was embarking on its last crucial role of finding a new and trustworthy owner for Satyam through a fair and transparent bidding process. in an option-based mechanism for a fair and transparent bidding process. the Board members argued against the reasoning. when things had stabilized. in fact. someone from the regulatory side with an understanding of regulations and statutory knowledge.
Venkatapathi Raju and Srisailam were found to be guilty and are in jail. Tech Mahindra was an appropriate choice as the new owner. Ultimately. This bail was revoked on 26 October 2010 by the Supreme Court of India and he was ordered to surrender by 8 November 2010. Raju was hospitalized in September 2009 following a minor heart attack and underwent angioplasty. Applicable Regulations There are various liability provisions that may be invoked following such investigations. his brother B Rama Raju. He is now barred from seeking bail till 31st July 2011 if trial is not over by then. conspiracy. The reason was that they consciously outsource to multiple vendors and do not want to put all their eggs in one basket now. Ramalinga Raju. prospectus. 8.with the likes of Indian majors like TCS taking over Satyam. being telecom-centric till now. they will be able to cross-sell extensively between Tech Mahindra and Satyam clients. statement or other document may be held liable to a fine or imprisonment or both. 30 . Raju was granted bail on condition that he should report to the local police station once a day and that he shouldn't attempt to tamper with the current evidence. according to the Board members. And some were reluctant to see any of the traditional IT bigwigs taking over Satyam. And. balance sheet. They had two advantages barring the appointment of a CEO and a few positions in top management they hardly had to undergo any restructuring. cheating. Raju’s Fate The Satyam founder. falsification of records. any person who makes a false statement or who omits any material fact knowing it to be material. Under the Companies Act. certificate. report. in any return.G Ramakrishna. in a tacit acknowledgement of Satyams specialized niche skills. former Satyam CFO V Srinivas and three other former employees of the company -. They were arrested by the Andhra Pradesh police on charges of breach of trust. more importantly.
is guilty of cheating. under the SCRA.250 million or both. Additionally. Under the Indian Penal Code. the penalty is civil in nature and may be up to three times the sum involved in a contravention. Further. including for failure to report material misstatements. There are also various liability provisions and penalties specified under the FEMA and the Income Tax Act and other legislations such as the EPF Act. 31 . The SEBI can also impose a penalty in the amount of the higher of Rs. The auditors may be liable under the Companies Act. The stock exchanges also have the power to suspend the dealings with respect to the securities of such company. Under the Income Tax Act. falsifies accounts or forges documents is liable to a fine or imprisonment that may extend to 10 years or both.250 million (approximately US$5. a person may be liable to fine or imprisonment or both for contravention of certain offences. any person who is a party to a criminal conspiracy. commits a criminal breach of trust. selling or dealing in securities. The SEBI has the powers to issue orders and suspend the trading of any security. lack of due diligence and gross negligence of professional duty.2 million) and three times the profit from transactions relating to insider trading. the substantial acquisition of shares or unfair and fraudulent trade practices. restrain any persons from accessing or buying.250 million for the failure to comply with the listing conditions. impound and retain the proceeds of any transaction and attach bank accounts.The shareholders of a company also have the right to file a suit against the directors of a company on the grounds of oppression and mismanagement. Under the FEMA. a company can be held liable to a penalty of up to Rs. the Indian Penal Code and the CA Act. the SEBI can initiate criminal prosecution for these offences and hold a person liable for imprisonment for up to 10 years or a fine of up to Rs.
The Satyam scandal is a classic case of Negligence of fiduciary duties. The fraud committed by the founders of Satyam is a testament to the fact that ―the science of conduct‖ is swayed in large by human greed. analysts. b. fame and glory. ambition. money. Some of the initiatives/ steps which an organisation can undertake in order to avoid future ‗Satyams‘ are:- a. Lasting solutions can only be found by transforming human consciousness through an inner discipline and higher moral reasoning. quality. Total collapse of ethical standards. A company can build sustainable competitive advantage through ethics. excellence. Low ethical and moral standards by top management. and the stock market. A transformed organizational culture which pays highest attention to ethical conduct and moral values will strengthen sustainable roots of the company. and hunger for power. It is human greed and desire that led to fraud. How this could be avoided in future? / Recommendations The Satyam Computer Services‘ scandal brought to light the importance of ethics and its relevance to corporate culture. social responsibility and human development. values. This type of behavior can be traced to: Greed overshadowing the responsibility to meet fiduciary duties. shareholders.9. 32 . value based vision of leadership and governance will go along in creating corporate governance. Greater emphasis on short‐term performance. Fierce competition and the need to impress stakeholders especially investors. Lack of corporate social responsibility. An integrated.
Separate the role of CEO and 33 . measure effectiveness. i.and is less likely to be detected. and high moral reasoning are critical to avoiding unethical behavior. Companies must be careful when selecting executives and top level managers. d. character must be maintained at any cost. The top management should always distinguish between opportunities and temptations. with the perpetrator thinking that small changes here and there won't make a big difference. it's worth investigating. and providing value based corporate vision. it's bound to trickle down. No matter what heights a person may reach. It is also important for companies to establish an organizational culture which supports ethical conduct through a code of conduct and properly laid out corporate governance policies and procedures. increased inner discipline. f. When making corporate decisions. This sends a message to a lot of companies: if your accounts aren't balancing or if something seems inaccurate. Personal ethics. Benefits from such engagement include higher trust and loyalty from stakeholders. Break down tasks so that there are checks in each area. increased goodwill. Transparency and effective auditing and regulatory checks through internal and external auditors and monitoring agencies will help establish long lasting credibility for any company.if there's corruption at the top. e. Advantages of this approach include fostering ethical behavior from employees. and continually improve their code of conduct. self‐discipline. A lot of fraud schemes start out small. Each employee must be accountable for their actions. Companies must take a step back when presented with challenging decisions and individuals must listen to ―the little voice in their head‖ in complying with law and to their heart in dealing with people. it is important to not lose sight of the individual‘s ethical reasoning.c. g. j. regardless of the role they play in the company. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds. even just a tiny bit. and higher investor confidence. Transparency in financial reporting as a moral duty and ethical conduct is also very important for companies to adhere to in order to uphold ethical standards. h. Companies should gather feedback. These are the people who set the tone for the company.
o Certificate of independence for independent directors. The increasing rates of white collar crimes demands stiff penalties and punishment. 10. It has forced the government to re‐write corporate governance rules and tightens the norms for chartered accountants. Learnings Satyam‘s fraud spurred the government of India to tighten corporate norms to prevent recurrence of similar frauds in future. Corporate governance framework needs to be implemented in letter as well as spirit. and strengthening of quality review. Independent directors should have challenging. When the same person takes on both roles. skilled ID‘s. who's left to check up on the CEO? Splitting up the roles helps avoid situations like the one at Satyam. creating an awareness of the large consequences of small lies may help some to avoid this trap. o Voluntary corporate governance code. o An institution of mechanism for whistle blowers. Some of the regulations include: o Promotion of shareholders ‗democracy with protection of rights of minority shareholders. o Cap at 10 percent on the revenues coming from a single client to an audit firm. 34 . education on ethical values. Hopefully. o Responsible self‐regulation with adequate disclosure and accountability and o Lesser government control over internal corporate processes. The government took action to protect the interest of the investors and safeguard the credibility of India and the nation‘s image across the world. rather than well known faces. The small distortions created by few immoral executives lad far reaching negative consequences. criteria for remuneration to key personnel. Additional lessons include having an effective ‗whistle blower policy‘ in place. Promoters should be prohibited from interfering in the recruitment of independent directors.Chairman of the Board. who have time to devote to the business.
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