Satyam Scandal and Corporate Governance Failure

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Table of Contents

Introduction
The Most Important Facts Surrounding the Case
The Key Issues
Alternative Courses of Action
Evaluation of Each Course of Action
The Best Course of Action Recommended: Government Intervention
Conclusion

Introduction

The concept of corporate governance has been practiced in India for nearly twenty years. However, several examples of disastrous corporative conduct indicate that the country’s corporate governance framework is not developed effectively and adequately enough. The most recent scandal concerns the case with Satyam Computer Services Ltd (“Satyam”) – the company that used to be India’s fourth-largest computer services firm.

Because of crucial mistakes in the governance system, Satyam turned out to be a huge failure, causing a lot of losses and trouble to its managerial team, stakeholders, and partners. The present analysis of the Satyam case study aims at identifying the most important facts surrounding the case, discussing the key issues concerned with it, suggesting the alternative courses of action and evaluating them, and recommending the most suitable course of action.

The Most Important Facts Surrounding the Case

The essential facts associated with the case are as follows:

On 27 June 1987, Ramalinga Raju founded Satyam Computer Services along with his brother-in-law. At first, there were as little as twenty employees, but the organization determined itself as a large-scale player in the country’s IT sector, concentrating on the services concerned with software outsourcing.
In 1991, the company made a successful first public appearance on the Bombay Stock Exchange. In four years, the company launched Satyam Infoway (“Sify”) that suggested back-office outsourcing services to a variety of customers in the US and Europe. In 1999, Sify was operating in thirty countries and became the first company from India to be listed in NASDAQ (National Association of Securities Dealers Automated Quotations).
Raju was getting on good terms with Indian business and political leaders. In 2000, during the US President’s visit to Hyderabad, Raju shared the podium with him. He built friendly relationships with many other leaders and important people.
In 2007, Satyam was appointed the official IT service provider for the FIFA World Cup in 2010 in South Africa and the FIFA World Cup 2014 in Brazil. In the same year, Raju was awarded the Ernst and Young Entrepreneur of the Year award for expanding his IT company to more than 50,000 employees. Raju was regarded to be one of the most successful Indian businessmen in many countries of the world.
In 2008, the company’s revenues exceeded $2 billion, and Satyam won many distinguished awards. In November, Raju co-chaired the World Economic Forum Summit that took place in New Delhi, India. At the summit, Raju announced his firm’s outstanding performance and promised to find a way out for Satyam in the global economic crisis.
The company’s downfall started at the end of 2008, after Raju’s shocking confession about inflating the data concerning the company’s performance. On 23 December, Satyam became blacklisted for eight years by the World Bank on the basis of bribing the bank officials and data theft. The beginning of 2009 was marked by the fall of the company, preceded by Raju’s shocking confession about numerous manipulations and fraudsters in Satyam. After the confession letter, the company’s drop in share price was 78%.
The actual cash and bank balance of Satyam were $65 million, while the inflated balance was $1.03 billion. The inflated accrued interest was $7.7, whereas, in fact, there was none. The actual liability was undisclosed, while the inflated liability was $252 million. Moreover, the actual number of employees was 10,000 smaller than the number reported by Raju – there were 40,000 employees instead of 50,000 mentioned. Raju used made-up names to redirect $4 million monthly out of the company’s accounts.

The Key Issues

There were four major issues that led to Satyam’s disgraceful collapse: including the independent directors in the company’s board committee, drawbacks in audit, problems with disclosure and transparency, and the failure in CEO/CFO role.

Failure of Independent Directors

The failure of Satyam was closely associated with the role played by independent directors. These people were supposed to control the company’s activity. However, they did not express either interest or anxiety with the state of things in Satyam. The independent directors had to inquire why the company had so much cash at its disposal, but they never raised such a question. On the contrary, they continued to keep silent for several years while knowing that such a way of conduct could be harmful to the company’s stakeholders and partners.

The way in which Satyam’s independent directors behaved may be called carelessness at best. In fact, this negligence bordered on fraudster, since keeping silence about such a major crime almost equals participating in the crime.

Drawbacks in Audit

The main role of an audit committee in any company is to make sure that its activity is transparent and clear to all stakeholders. In the case with Satyam, however, the audit committee did not perform its functions. Such actions led to the failure of the company’s control system and did not present a true picture of the financial matters at Satyam. The audit committee did not perform the necessary role in restricting false information about the financial matters in Satyam.

The failure of the audit committee to provide the board with realistic facts negatively affected the organization’s performance.

Problems with Disclosure and Transparency

One of the keys to success in business is providing the transparency and disclosure of the company’s materials so that the real state of things could be seen and evaluated. By providing these principles, the organization demonstrates its capability or incapability of doing the business, and its prospects can be seen by the stakeholders. In the case with Satyam, neither transparency nor disclosure was provided. The data provided by Raju did not reflect the real state of things, which led to investors losing huge sums of money without even guessing it. All the data provided to stakeholders was fabricated, and no one suspected what was actually happening within the organization.

Therefore, the norms of disclosure and transparency existing in Satyam greatly undermined the access to realistic data.

Failure in CEO/CFO Role

Finally, Satyam had problems with the role played by CEO and CFO. The rules of corporate governance presuppose that the company’s CEO/CFO guarantees the accuracy and honesty of the company’s financial statements. Unfortunately, Satyam’s CEO Raju and CFO Vadlamani did not perform their functions properly. Because of their illegal activity that resulted in hiding the true financial data, the company’s investors, stakeholders, and clients did not even guess about the catastrophic situation with the matters in Satyam.

The company’s strategy and performance suffered from such wrongdoing of the major people in the organization. The whole strategy was built in a wrong way because no one knew that the numbers were not true, and no one could plan any actions aimed at improving the situation.

Alternative Courses of Action

Failures of Satyam’s operations at various levels require a thorough reconsideration of the company’s work and finding possible ways of saving the situation. The following three alternative courses of action at Satyam seem plausible, dividing the responsibilities, inviting independent supervisors, and government intervention. By dividing the responsibilities, the company would have avoided the concentration of power and access to information in one or a few people’s hands.

Inviting independent supervisors would have eliminated the fraud schemes as independent curators are interested not in personal profit but in finding flaws in the organization’s work. Government intervention would have shown to the company that there is always a higher power than the company’s management. If the government had demonstrated its interest and control, Raju would not have felt so powerful and would not have been able to perform so many illegal operations in Satyam.

Evaluation of Each Course of Action

Dividing the Responsibilities

The first suggested solution is concerned with sharing the duties between the members of a company as opposed to concentrating the majority of the power in the hands of just one person or a few people. If several people know that they have to cooperate and evaluate the organization’s results at regular periods of time, they will feel an increased responsibility and dedication to a highly objective assessment. Moreover, if a person planning any illegal actions knows that his or her actions will be observed and analyzed by others, the plans to perform fraudster might be reconsidered.

For instance, if Raju had known that people other than him would be able to notice the discrepancies in financial papers, he would have had no desire or, at least, opportunity to lead to such disastrous outcomes. The costs of such a course of action are not as high as the people can be chosen from the managing team or other subordinates. However, the benefits are rather good – everyone within the organization will know that there is no way of performing any illegal actions as several people will be responsible for different parts of the process, and they will regularly compare and contrast the numbers.

Inviting Independent Supervisors

This course of action is a little bit more time- and cost-consuming. Still, the benefits of such an approach would outnumber the costs. If Satyam had invited independent supervisors, the intricate scheme of hiding huge sums of money would have been impossible. People from the outside would not have had any personal preferences, and they would have been rather objective in their judgments. Also, it would have been difficult to bribe such supervisors, as the company’s manager could not have known beforehand what people would be assigned to check the financial data.

Government Intervention

The third suggested solution also requires additional resources, but it could have saved the company from the disaster. As the experience with Satyam shows, not only the organization but also the whole country became a symbol of a fraudster and lost the trust and support of many ex-partners all over the world. Therefore, it is crucial that the government should control such huge companies. If there had been some government interventions, it would have been possible to notice the problems at Satyam at the initial stages and find solutions to save the situation.

The Best Course of Action Recommended: Government Intervention

Although government intervention is probably the most time- and cost-consuming out of the suggested solutions, it seems the most productive one. The other two alternatives also have some good points, but they do not suggest the same level of control. And as the case of Satyam shows, the lack of control was the major cause of such a disastrous end of the company.

The feasibility of government intervention is lower than that of dividing the responsibilities. However, from a technical and operational standpoint, it is quite reachable. Compared to inviting independent supervisors, government intervention suggests more control and requires nearly the same expenses. Therefore, taking into consideration all risks and benefits, this course of action is the most suitable one.

Conclusion

The sad story of one of the most successful Indian computer software companies gives several lessons to be learned. Due to crucial errors in the corporate governance system at Satyam, the organization’s CEO was able to perform a huge number of illegal operations and remain undiscovered for several years. There were drawbacks in Satyam’s audit, problems with transparency and disclosure, and failures of independent directors and is CEO/CFO roles.

Taking into consideration the scale of losses to which such deficiencies led, it seems necessary to reconsider the ways in which large companies organize their governance system. Independent supervision shared responsibilities, and government control are necessary to eliminate the appearance of similar disasters in the future. While such measures may require extra resources, the outcomes will be rather productive for the companies, their employees, and the country whose reputation these companies should support.

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