This Study Resource Was: Andrew Robinson Corporate Governance Failure at Satyam Case Analysis

Corporate Governance Failure at Satyam Case Analysis 1
Andrew Robinson
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Corporate Governance Failure at Satyam
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Case Analysis
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Table of Contents
Introduction………………………………………………………………………….…………3
CEO/Founder…………………………………………………………….………………..3
Satyam…………………………………………………………………………...…….….3
Case Analysis………………………………………………………………………….…………4
Satyam’s Problem…………..……………………………………..………………………….….4
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Auditing……………………………………………………….……………………..4
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Corporate Governance……………………………………………....………………5
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Courses of Action Taken By Government…………….………………...……...…………5
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Evaluation of COA………..………………………………………………………………6
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Recommendation……………………………………………………………………………….7
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Future Impact of Company………………………………………………………………..

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References……………………………………………………………………………………….
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Introduction
“Corporate governance is the system of principles, policies, procedures, and clearly defined
responsibilities and accountabilities, used by stakeholders to eliminate or minimize conflicts of interest.”
(Clayman, Fridson, Troughton, 3). Satyam had many problems internally and the main reason was that of
poor corporate governance. If they would have used proper corporate governance policies, they would
have been sustainable for years to come. Because of the massive scandal, the Indian government had to
take it over. This was uncommon in business practices. India knew that if Satyam fell, the Indian
corporate image would fall as well. The failure of corporate governance by Satyam almost crippled the
Indian economy and tarnished the outsourcing trust by global companies.
CEO/Founder: Ramalinga Raju
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Ramalinga Raju came from an influential land-owning caste in India and was considered one of the early
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pioneers of the Indian IT success. During Raju’s rise to fame, he built close relationships with Indian
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politicians and business leaders. He was a highly regarded entrepreneur and a distinguished figurehead at
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prestigious corporate events in India. Many people acclaimed him to be a business visionary. Even though
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he was a genius in the global technology field, he will be remembered as the person that started the
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biggest corporate fraud in India. The Satyam fraud was so big that it almost crippled his country
economically.
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Company Satyam:
Satyam Computer Services was founded by Ramalinga Raju on June 27 th, 1987 in Hyderabad India. The
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Information Technology sector of India was and still is one of the most prominent sectors of that country.
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“IT industries account for 6% of the GDP of India and provide employment directly or indirectly for over
2.3 million people. It also contributes very significantly to India’s exports: accounting for around 18% in
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2001.” (The Viewspaper 2010). Raju knew that this sector of India would be the next big thing for India
and so with the help of his brother-in-law, he created Satyam. Satyam was overall a very successful
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business. They won countless awards for different sections of business such as “Best Risk Management
and Solution Delivery” to “Organization that Creates Fun and Joy at Work”. Satyam has also won the
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Golden Peacock award twice for corporate governance excellence. Satyam had a big clientele base with
many companies in the Fortune 500. Satyam launched Satyam Infoway, which offered back-office
outsourcing services. It also was known for its prestigious clientele that included names such as GE and
the US Department of Defense. It was the first Indian company to be listed on the NASDAQ. In 2001,
Satyam was listed on the New York Stock Exchange with revenues exceeding $1 billion USD. In 2008,
Satyam revenues surpassed $2 billion USD. Satyam was enjoying the excellent performance that the
company was putting out. Their overall performance put them as being the 4th largest IT company in
India.
Case Analysis
Satyam’s Problem:
Auditing:
Satyam had many problems internally ranging from cooking the books to trying to bribe World Bank
officials and stealing private information. The overall main problem was bad corporate governance. They
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had bad corporate governance with their auditors, overall board composition and competence, and as well
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as the way they, in general, ran their business. Satyam shattered the “Good Governance Myth” when
Raju, Satyam’s founder, confessed to several years of manipulation and fraud. The reason being is
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because they had all the right characteristics ranging from a solid and capable board on paper to one of
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the leading auditors in the world but it was all just aesthetic. Raju appointed PricewaterhouseCoopers,
that was one of the big four international accounting firms, as the company’s auditor. PwC did not do
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there due diligence for Satyam’s books. They had falsified bank statements and financial accounts. They
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had a misleading cash balance and Satyam understated liabilities and overstated income. Satyam also had
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a misrepresentation of employees. They had 10,000 more employees on her roster and they had nobody
running a fine comb through their business. The big question is “why didn’t PwC ask any questions?” All
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they had to do was just question the financial statements or even do a simple lookup of their bank
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statements to see that what they were portraying was inaccurate and false. In a ruling filed by the SEBI,
they noted that “By accepting the information provided by the company at face value and performing a
perfunctory job (despite warnings), the auditor has failed to live up to the expectations of shareholders.”
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(Shah. 2018)They also note that “…spanning a period of at least eight years would reveal that the
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perpetration of the fraud could not have been made possible without the knowledge and involvement of
the statutory auditors.” (Shah. 2018)
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Corporate Governance:
Poor board composition and competence was another key problem with Satyam as well as the way they
ran their business. In India, there was no shortage of regulations and legal provisions for independent
directors but the problem was the ability to implement and follow through of the provisions. A problem
was that there were no qualifications or eligibility criteria to hire independent directors. This can make
things very interesting for hiring a board for a company in India. Without any guidelines for board
members, companies can hire anybody they want to help make company decisions, which could be best
friends, politicians, complementary company officials that can create opportunities that other people
cannot. Hypothetically, a company wants board officials that have the education, experience, and that can
bring value to a company. It was hard for independent directors to act unbiased because they were paid by
the promoters. Promotors were the ones who owned the company and/or had a controlling stake in the
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company. Independent directors were on friendly terms with promotors and through the friendly terms,
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family and friends were often nominated to boards and board decisions were greatly influenced.
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Independent directors were supposed to have the companies and minority shareholders’ best interests in
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mind and with all the bias that goes on, a deceiving manager or fraudulent activity can take place with
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Courses of Action Taken By Government:

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After Satyam’s collapse, the Indian government had two choices; they could let Satyam fall, or they could
take over the company and try to restore what was left of the company. They chose to save the company.
Before the government took over Satyam, they arrested Satyam’s chairman Raju, his brother B. Rama
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Raju, and Satyam’s CFO Srinivas Vadlamani. Two PwC partners were also arrested by the SEBI after
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they issued a show-cause notice to PwC. After the arrests of the Satyam officials, the Indian government
sacked Satyam’s board and appointed six new board directors. The Ministry of Corporate Affairs acted as
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a nodal agency for stabilizing Satyam’s operations, an act that most US and Europe nations would not
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bother with. It took three months with six government-appointed board members to get operations back
on track. Besides having the government taking over a public corporation, they got things back on track in
three months which was a record because many corporations and businesses spend decades on
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rehabilitation plans. So a person can assume this was a very important case and was a top priority for the
national economy. After the government got things back on track, their next step was to auction off the
company to the highest bidder. The government knew they cannot keep control of the company for the
long term so they have to find a suitable company to take it over. The Indian government wanted a global
competitive strategy for the bidding process and whoever the acquirer was could not sell their equity
shares for three years so a company could not just buy it and then turn around and strip its assets. In
response to the Satyam scandal, the Securities and Exchange Board of India made it mandatory for
controlling shareholders of companies to disclose pledging of shares. Because more than half of India’s
companies were controlled by powerful families, this would force the “controlling” shareholders to reveal
all of the borrowings against their shares so the rest of the board knows what the overall situation is with
the controlling shareholder.
Evaluation of Government Solution:
The scandal of Satyam highlighted the fact that inappropriate business conduct could take place easily in
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any part of the globe. Incidents led to the strengthening of regulatory frameworks such as Sarbanes-Oxley
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Act and the Higgs and Smith Reports. The Indian government did what no US or European government
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had done before. They stepped in and saved Satyam. They breached the wall between public business and
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government operations. It was a bold move to save this company. Now the question would be “Will the
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Indian government save every prestigious big name company?” and that answer would be no. India had to
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save Satyam, not just for Satyam’s pride, they saved it for the entire country. After the Satyam scandal hit
the news, India’s global reputation was smeared. Satyam was a corporation that was family-owned and
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more than half of the companies in India are family-owned. If the Indian government would of let Satyam
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fall, they would be telling the international corporate world that they do not care about what their
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corporations do. Their whole economy and outsourcing would have been crippled. I believe that the
Indian government made the best case scenario with the hand they were dealt. I think that if they would of
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let Satyam fall then they could have fallen into a recession causing other nations to go into a recession
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which would have caused two recessions in a matter of ten years. National economies are all connected
and if one economy is suffering, the whole global economy suffers. After the Indian government took
control over the Satyam board, they had one of the quickest turnaround plans that anybody had ever seen.
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It took most companies years to create a comeback for a company and it took the Indian government only
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a few months. They did the best they could and the quickest they could to stabilize the operations to get
the company ready to sell to the highest bidder. I also believe they did the right thing by stipulating that
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whoever the acquiring company was, that they could not turn around and sell their equity shares for three
years. They did not want another company coming in and consuming Satyam and all the government hard
work to save the company would have gone to waste. I believe the government did the right thing to show
the global community that they can still outsource their company to India and it is stable and has the
proper corporate governance than any other country has.
Recommendation
There are a few solutions that I would have recommended. One would be that the Indian government just
let them go bankrupt. I believe this would have been a hard stance taken by the Indian government but
one that would have set the tone with all other companies in India that would have said that the
government wouldn’t bail you out just because of your mistakes and pride. But bailing them out I believe
had more upside to the nation than just letting them go bankrupt. I believe that clearer standard needed to
be set as soon as possible for India. This part of their government was severely lacking and needed to be
updated. I think if they could not figure out a proper way to handle the clearer standards, they could of
went to other nations and did their research to take back to their nation and edit it to fit their corporate
standards. I also believe that promoters should not have the controlling interest in their company. I think
they should take a step back and make sure they hire competent and qualified members to be on their
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board to run their company. I think if the promoters had done this in the first place, they would not have
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had a need to step in and force their will on the company. They hired the board members for a reason.
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They are not there just for show. They are there to make your business as successful as possible because
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like promoters, they also have a stake in the company. If promoters knew their company was in capable
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hands, they would step back and turn their attention to other matters. Whenever the government sets
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clearer standards and has penalties so corporations can abide by them, they can have more checks and
balances for corporate boards and a more overall stringent guideline. Even though corporate governance
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mechanisms cannot prevent unethical activity by top management completely, but they can at least act as
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a means of detecting such activity before it is too late. I also believe that the corporations auditing
procedures could be freshened up as well. Satyam should have used a revolving circle of different
auditing firms to make sure that the company is keeping itself straight. Even though PwC was one of the
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most famous international auditing firms, it would not have hurt to get a different set of eyes on the
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financial records and company records to make sure everything was up to standard and code. I think the
auditing firms could strengthen their quality review as well. Board members rely on the auditing firms
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information they present them to give them a fair value of the company’s health and financial situation. If
there would have been stricter quality review standards, then this fraud would probably not have gotten as
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far as it did.
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Future Impact of Company:
I believe that the future impact of the company would be intact in a sense. Even though they got bought
out by a different company and merged, the rules and guidelines that can be established from this scandal
can rocket India’s corporate guidelines to the 21st century.
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References
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Growth and Impact of IT Industry on Indian Economy.” The Viewspaper Economic Issue Growth and
Impact of the IT Industry on the Indian Economy Comments, 7 Aug. 2010,
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http://theviewspaper.net/economic-issue-growth-and-impact-of-the-it-industry-on-the-indian-economy/
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Shah, Palak. “Satyam Scam: PW's Saga of Ignored Red Flags.” The Hindu Business Line, The
Hindu Business Online, 11 Jan. 2018,
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http://www.thehindubusinessline.com/markets/stockmarkets/satyamscampwssagaofignored
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redflags/article10027012.ece
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Corporate Governance Failure at Satyam Case Analysis 1

Future Impact of Company………………………………………………………………..

CEO/Founder: Ramalinga Raju

Courses of Action Taken By Government:

Evaluation of Government Solution:

Future Impact of Company:

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