41741272 project-ii-failure-of-satyam3

Organizational Behaviour
Project II

Organizational Failure: The Satyam Saga

Group Members (D/3):

Daisy Basumatary 197

Dass Banty Ashok 198

Devashish Agarwal 200

Prateek Vijaivargia 225

Ravi Rambhatla 231

Satheesh Gowtham 233

Sathyamoorthy M 234

Shivakumar R 237

Organizational Behavior

Table of Contents

1.0 EXECUTIVE SUMMARY .....................................................................................4
2.0 COMPANY PROFILE ..........................................................................................5
2.1 Achievements ................................................................................................................... 6
2.2 Industry Presence ............................................................................................................. 6
2.3 Competencies ................................................................................................................... 7
2.4 Controversies .................................................................................................................. 10
2.4.1 Maytas acquisition ...................................................................................................... 10
2.4.2 World Bank................................................................................................................. 10
2.4.3 Upaid lawsuit .............................................................................................................. 10
2.4.4 Accounting scandal of 2009 ....................................................................................... 10
3.0 THE CHRONOLOGY OF SATYAM FAILURE: .....................................................11
3.1 Details............................................................................................................................. 11
3.2 The Aftermath: ............................................................................................................... 12
4.0 THE ANALYSIS: SOURCES/CAUSES ...............................................................13
4.1 Corporate Governance: .................................................................................................. 14
4.2 Failure of Supervisory and Regulatory Agencies: ......................................................... 15
4.3 The Auditor: ................................................................................................................... 15
4.4 Number of Employees:................................................................................................... 17
4.5 The Maytas chapter: ....................................................................................................... 18
4.6 The role of SEBI: ........................................................................................................... 20
4.7 Ministry of Corporate Affairs: ....................................................................................... 21
4.8 The Income Tax Department: ........................................................................................ 21
4.9 Institute of Chartered Accounts of India (ICAI): ........................................................... 21
5.0 MORAL AND ETHICAL FAILURE: ...................................................................21
6.0 MEASURES TO AVOID SUCH RECURRENCES:..................................................24
6.1 The Laxity of Indian laws: ............................................................................................. 24

PGP13/Group 3/Section D Page 2

6.2 Conclusions and Recommendations: ............................................................................. 25
6.3 Five Core Issues of governance ..................................................................................... 27
6.4 A problem of ethical deficit ........................................................................................... 28
7.0 CONCLUSION: .................................................................................................29
8.0 SOURCES OF INFORMATION ...........................................................................30



1.0 Executive Summary

On January 7th, 2009, Satyam Systems, a global IT company based in India was added to a
notorious list of companies involved in fraudulent financial activities, one that includes such
names as Enron, WorldCom, Societe General, Parmalat, Ahold, Allied Irish, Bearings and
Kidder Peabody. Satyam's CEO, Ramalingam Raju, took responsibility for broad accounting
improprieties that overstated the company's revenues and profits and reported a cash holding of
approximately $1.04 billion that simply did not exist.

Satyam Computers, the fourth largest IT industry of India, The member of Nifty 50, BSE
Sensex, and winner of golden peacock award for best corporate governance, and many more
laurels that it has in its kitty did not stop it from drowning like a rock in its dirty waters.

Satyam, which means ―truth‖ in Sanskrit, plunged in New York trading, after earlier dragging
down India‘s benchmark index, in a scandal described as ―horrifying‖ by markets regulators.
Raju‘s reign unraveled as a shareholder revolt blocked the asset purchases, a World Bank ban
kept Satyam from bidding for orders and four directors quit.

The disclosure of fraud of such magnitude caught everyone by surprise. Questions arise over
why this episode actually took place. What was the reason behind it.

Was it the result of individual greed?

Was it celebration of profit-making?

Was it belief in markets or regulatory failure?

Through this report we analyze the event and the happenings that covered the failure of satyam
in the organization theory perspective.



2.0 Company Profile

Satyam Computer Services Ltd was founded in 1987 by B Ramalinga Raju. The company offers
consulting and information technology (IT) services spanning various sectors, and is listed on
the New York Stock Exchange, the National Stock Exchange (India) and Bombay Stock
Exchange (India). Satyam's network spans 55 countries, across six continents. The company
employs 45,000 IT professionals across development centers in India, the United States,
the United Kingdom, the United Arab Emirates, Canada, Hungary, Singapore, Malaysia, China,
Japan and Australia. It serves over 489 global companies, 156 of which are Fortune
500 corporations. Satyam has strategic technology and marketing alliances with over 50
companies.



2.1 Achievements

#1 in ASTD(American Society for Training and Development) BEST award, 2007

#2 BPO Global Rankings- BrownWilson Group‘s 2008 Black Book of Outsourcing

UK Trade and investment India (UKTI) Business award for Corporate Social
Responsibility

Golden Peacock award for Excellence in Corporate Governance

2.2 Industry Presence

Banking, Financial Services Manufacturing, Chemicals &
Aerospace and Defense Energy and Utilities Life Sciences & Healthcare
&Insurance Automotive

Telecom, Infrastructure, Media
Travel and Logistics & Industrial
Public Services & Education Retail and Consumer Packaged and Entertainment &
Equipment
Semiconductor



2.3 Competencies

Mahindra Satyam offers the following ‗horizontal‘ services.

Extended Web Business
Engineering Quality
Enterprise Commerce Intelligence
Service Consulting
Solutions Solutions Services

Strategic Industry
Outsourcing Native BPO
Services Solutions

2.4 Company Composition



2.5 Pioneereed

Pioneered delivery of offshore service (John Deere & Co.)

First Indian Co. to set-up dedicated satellite link

First IT company to get ITAA certification

Set-up India’s first private ISP – SIFY

Among world’s first 10 companies to get SEI-CMM Level 5 assessment

Forming Alliances with best of breed technology vendors very early on

Adoption of Verticalization and a customer-centric organizational
Structure

Pioneered ITES quality framework – eSCM

Among the first to be certified under BS 7799 for ISMS

First & only Lead Auditor for eSCM

2.6 Trusted By

8 of the top 10 Auto majors

7 of the top 10 Electronics and Electrical Equipment Manufacturers

6 of the top 10 Pharmaceutical companies
4 of the top 5 Networking and Other Communication Equipment
Manufacturers

3 of the top 5 Healthcare companies

2 of the top 5 Securities companies



2.7 Company Structure

Shareholding Pattern as on 31st
March 2008
19.46% 8.74% Promoters
10.58% 61.22%

Institutional
Shareholders



2.7 Controversies
2.7.1 Maytas acquisition

In 2008, Satyam attempted to acquire (Maytas Infrastructure and Maytas Properties) founded by
family relations of company founder Ramalinga Raju for $1.6 billion, despite concerns raised by
independent board directors. Both companies are owned by Raju's sons. This eventually led to a
review of the deal by the government, a veiled criticism by the vice president of India and
Satyam's clients re-evaluating their relationship with the company. Satyam's investors lost
about INR 3,400 crore in the related panic selling. The USD $1.6 billion (INR 8,000 crore)
acquisition was met with skepticism as Satyam's shares fell 55% on the New York Stock
Exchange. Three members of the board of directors resigned on 29 December 2008.

2.7.2 World Bank

The World Bank had banned Satyam from doing business with it for 8 years due to inappropriate
payments to the World Bank's staff. The World Bank accused Satyam of giving improper
benefits to its (the Bank's) staff and of failing to maintain documentation to support fees charged
for its subcontractors. However, it clarified that Satyam was not involved in incidences of data
theft or malicious attacks that had been made on the Bank's information systems.

2.7.3 Upaid lawsuit

UK mobile payments company Upaid Systems sued Satyam for over 1 billion US dollars on
complaints of fraud, forgery and breach of contract. On 9-December-2009 Satyam settled the
lawsuit with UPAID for $70MM, of which $45MM was payable upon regulatory approval, and
the remaining $25MM was payable a year after the initial payment. The settlement requires
Upaid to give Mahindra Satyam a worldwide royalty-free license on its patents, and provides for
the dismissal of all pending actions including the litigation between the companies pending in the
U.S. court.

2.7.4 Accounting scandal of 2009

The Satyam Computer Services scandal was publicly announced on 7 January 2009, when
Chairman Ramalinga Raju confessed that Satyam's accounts had been falsified.



3.0 The chronology of satyam failure:

Satyam means "truth" in Sanskrit. But the name was proved wrong by the founder himself when he
himself busted one of the biggest frauds in the world of India Inc.

3.1 Details

On 7 January 2009, 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.

Raju confessed that Satyam's balance sheet of 30 September 2008 contained:

 Inflated figures for cash and bank balances of Rs 5,040 crore (US$ 1.04 billion) (as
against Rs 5,361 crore (US$ 1.1 billion) crore reflected in the books).
 an accrued interest of Rs. 376 crore (US$ 77.46 million) which was non-existent.
 an understated liability of Rs. 1,230 crore (US$ 253.38 million) on account of funds was
arranged by himself.


 an overstated debtors' position of Rs. 490 crore (US$ 100.94 million) (as against Rs. 2,651
crore (US$ 546.11 million) in the books).

Raju claimed in the same letter that neither he nor the managing director had benefited
financially from the inflated revenues. He claimed that none of the board members had any
knowledge of the situation in which the company was placed.

Satyam, the 2008 winner of the coveted Golden Peacock Award for Corporate Governance have
faced government and stakeholder‘s pressure ever since its plan to acquire two infrastructure
companies owned by Mr. Ramalinga Raju‘s sons – Maytas infrastructure and Maytas properties
for $1.6 billion was rejected by investors last December. The failed acquisition plan resulted in
panic selling by investors causing loss worth millions to investors in India. In the New York
Stock Exchange, Satyam‘s share price plunged by 55%. Mr. Raju in his resignation statement
confessed that the acquisition plan was ―the last attempt to fill fictitious assets with the real ones.
When it failed Mr. Raju had no other option but to resign taking entire responsibility for the
accounting fraud but hoping that the company would bounce back. Analysts however have
expressed skepticism at Satyam‘s ability to bounce back.

3.2 The Aftermath:

As Mr. B. Ramalinga Raju, Chairman and founder of Satyam Computer Services resigned after
confessing to falsifying accounting records and inflating accounting profits, Satyam shares
plummeted 77.69% on the Mumbai Stock Exchange. Analysts and journalists were quick to draw
similarities between Enron and Satyam - India‘s 4th largest software consultancy, system
integration and outsourcing firm, listed on the New York Stock Exchange, with network
operations in 66 countries across six continents, employing over 50,000 IT professionals and
serving over 654 global companies including a large number of Fortune 500 companies.



4.0 The Analysis: Sources/Causes

“It is only when the tide goes out that you realize who has been swimming naked.”

Satyam was always seen as one of the top Indian IT companies and often represented as shining
example of Indian liberalization and entrepreneurship. This fraud that will impact the investors
and employees of the company shows a systemic breakdown in audit and board oversight of the
company. How this happened and who caused it to happen. As the scandal unfolded, Merrill
Lynch (Now with the Bank of America) terminated its engagement with the company. The New
York Stock Exchange immediately suspended trading in Satyam shares. Consequently analysts
speculated about the possible negative impact of this scandal on foreign investors‘ willingness to
invest in emerging markets like India.

Many analysts while attributing Satyam‘s downfall to failure of corporate governance have
emphasized on making family owned businesses founders aware of the risks inherent in non
adoption of corporate governance frameworks in their true spirit emanating from the reluctance
of the owners to introduce transparency and professionalism in their businesses. Even though
Satyam Computers had independent directors on their board of directors, their inability
apparently due to lack of expertise or knowledge of accounting frauds raises the question of the


role and responsibilities as well as qualifications, skills and expertise of independent
nonexecutive directors.

4.1 Corporate Governance:

ACCA research indicates that failure in corporate governance is a major contributor to the credit
crunch and consequently the current financial turmoil. Corporate governance is the set of
processes, customs, policies, laws, and institutions affecting the way a corporation is directed,
administered or controlled. Corporate governance also includes the relationships among the
many stakeholders involved and the goals for which the corporation is governed.

The principal stakeholders are the shareholders, management, and the board of directors. Other
stakeholders include labor (employees), customers, creditors (e.g., banks, bond holders),
suppliers, regulators, and the community at large. Corporate governance is a multi-faceted
subject. An important theme of corporate governance is to ensure the accountability of certain
individuals in an organization through mechanisms that try to reduce or eliminate the principal-
agent problem.

A related but separate thread of discussions focuses on the impact of a corporate governance
system in economic efficiency, with a strong emphasis shareholders' welfare. There are yet other
aspects to the corporate governance subject, such as the stakeholder view and the corporate
governance models around the world. Collapses like Satyam demonstrate that regulatory boxes
may have been ticked but fundamental principles of corporate governance have been breached.

The charitable explanation for corporate collapses like Satyam is that those responsible did not
understand the risks that were being taken thus suggesting a failure of diligence and
professionalism. A less charitable explanation is that those responsible knew about the risks but
chose to turn a blind eye.



4.2 Failure of Supervisory and Regulatory Agencies:

Satyam may be an exception because of the sheer magnitude of the amount of defalcation, which
is two-and-a-half times the sum involved in the Enron scandal. But the fact remains that all the
supervisory and regulatory agencies failed to detect and prevent the Satyam scam, and that this
failure is structural and pervasive.

These agencies include:

The statutory auditor (Price Waterhouse, the Indian subsidiary of
PriceWaterhouseCoopers)
Satyam's independent directors
The Ministry of Corporate Affairs
The Registrar of Companies
The Company Law Board
The Institute of Chartered Accountants of India
The Securities and Exchange Board of India (SEBI)
The Quality Review Board (QRB), a high-powered 11-member committee appointed by
the Indian government for chartered accountants.

Many of the agencies did not perform their assigned oversight functions, ignored complaints and
warnings, or actively covered up the fraud.

4.3 The Auditor:

Price Waterhouse, which has been Satyam's auditor since 1991, blindly certified its account-
books to be correct and accurate without verifying their authenticity. It failed to detect huge
transfers of funds, of the order of over one billion dollars, according to Raju's own confession.


Before one gets into the endoskeleton of what exactly caused the audit failure in the Satyam
case, it would be prudent to examine what exactly is the role of the Auditor.

The Role of Auditor:

The complete scope of who an auditor is and what he does is laid down by many sections of the
Companies Act. Sec 209 of the Act lays down that not should a company maintain ―proper‖
books of accounts; such books should also give a true and fair view of the state of affairs of the
company. Sec 211 of the Act, inter alia, requires that every balance sheet of the company should
give a true and fair view of the state of affairs of the company at the end of the financial year and
that every profit and loss account should give a true and fair view of the of the profit and loss of
the company and they should comply with accounting standards.

An audit, as defined in the landmark case of Frankston and Hastings Corpn. v. Cohen, (1960)102
CLR 607, comprises of three main objects –

1. To certify to the correctness of the financial position as shown in the balance sheet, and
the accompanying financial statements.
2. The detection of errors.
3. The detection of fraud. The detection of fraud is of primary importance.

Having said, it is also paramount to state that the auditor is a watch-dog, not a bloodhound.
This means that his job is verification and not detection. When suspicion is aroused, it is his duty
to probe the issue to the bottom but in case there is no material to arouse suspicion, he is not
bound to go sniffing around with the intention of uncovering financial anomalies.

In the case of the Satyam audit failure, it shows that though there is evidence of negligence at
many levels, there is none with respect to collusion or criminal conspiracy on part of the
auditors. PWC relied on the documents provided by the company to do the audit. The charges of
negligence have been heaped on them because they did not go to every bank to independently
verify that the cash deposits as shown in the books really existed. Though ideally, an auditor is


supposed to do this, it is a fact that very few actually do. In fact when a firm like PWC is dealing
with a company like Satyam (which won the prestigious Golden Peacock Award for Corporate
Governance in 2008) it generally takes the company at its word that the statements provided are
true and represent the true state of affairs.

Two of accounting company's directors has since been arrested. They failed to verify the
authenticity of the bank documents pertaining to cash reserves and balances presented to them by
Satyam's management.

It is likely that there was collusion between Satyam and its auditor. According to Deepak Parekh,
the chairman of a reputed private bank who was appointed to the Satyam board after the scandal
broke out; these documents were 'obvious forgeries' and would have been visible as such to
anyone.

4.4 Number of Employees:

One of the biggest sources of defalcation at Satyam was the inflation of the number of
employees. Raju claimed that the company has 53,000 people on its payroll. But according to the
Criminal Investigation Department of the Andhra Pradesh police, the real number was just over
40,000. This closely matches the number of Satyam employees registered for provident fund
payments, a little over 43,000.



The fictitious number could be conjured up
only because payment to the remaining 10,000 employees was faked year after year - an
operation that evidently involved the creation of bogus companies with a large number of
employees. Yet, no one detected this massive fraud.

Similarly, going by Raju's account, Satyam's operating margin was as low as three percent. But
India's top-ranking IT companies have margins of 20 to 30 percent. If Satyam's margin was
indeed higher, then hundreds of millions of dollars were spirited out of the company, without
detection.

4.5 The Maytas chapter:

WHEN the disgraced founder of Satyam, B. Ramalinga Raju, named his two other pet projects as
Maytas Infra and Maytas Properties, the parent company spelt in reverse, little would he have
imagined that their fortunes too would go topsy-turvy.


Another source of fraud was the Satyam board's decision last December to invest 1.6 billion
dollars to acquire a 100 percent stake in Maytas Properties and in 51 percent stake in Maytas
Infrastructure. Both of these real estate firms were promoted by Raju's sons. They also floated 21
other companies under the Maytas brand.

This investment decision was in gross violation of the Companies Act 1956, under which no
company is allowed without shareholders' approval to acquire directly or indirectly any other
corporate entity that is valued at over 60 percent of its paid-up capital.

Yet, Satyam's independent directors went along with the decision, raising only technical and
procedural questions about SEBI's guidelines and the valuation of the Maytas companies.

They did not even refer to the conflict of interest in buying companies in a completely unrelated
business, floated by the chairman's relatives. Indeed, one of the independent directors, Krishna
Palepu, a professor at Harvard Business School, praised the merits of real estate investment on
Satyam's part.

Palepu was earlier an independent director on the Global Trust Bank, which collapsed in 2003,'
recalls former union revenue secretary E.A.S. Sarma, a public-spirited civil servant of high
integrity.



4.6 The role of SEBI:

C.B. Bhave, Chairman of SEBI, at a press conference in Mumbai on January 21

Sarma recently warned SEBI and the Prime Minister's office about malfeasance in Satyam, but
was ignored.

SEBI's failure was even starker. Irregularities were repeatedly reported to it in Price
Waterhouse's handling of Satyam accounts in 2001 and 2002. But mysteriously, it failed to
conduct an investigation. Similarly, a complaint was filed with SEBI by a Member of Parliament
in 2003. But under political pressure, this was not pursued.

Last December, SEBI also approved the Maytas investments. The investment decision were
eventually reversed because of shareholder protests, not because of the regulatory authorities'
actions



.

After Ramalinga Raju made his 'voluntary confession' on Jan. 7, SEBI wasted precious time and
did not move to interrogate him or to seize Satyam's papers until after he had surrendered to the
state police. The police have still not allowed SEBI to question him.

4.7 Ministry of Corporate Affairs:

Similarly, other official agencies, including those under the Ministry of Corporate Affairs, did
not discharge their obligations or were prevented from doing so.

4.8 The Income Tax Department:

The Income Tax Department unearthed several cases of illegal transfers by Satyam as early as
2002. But the concerned official was transferred and the investigation suppressed.

4.9 Institute of Chartered Accounts of India (ICAI):

Equally striking is the failure of the Institute of Chartered Accounts of India (ICAI) to take
punitive action against Price Waterhouse, which it is empowered to do. Ironically, Price
Waterhouse has two members in the ICAI disciplinary council! The council met earlier this
month, but failed to take action against PwC. ICAI is a closed professional guild. Like the Bar
Council or Medical Association of India, it shields even the most errant of its members. To the
best of knowledge, not a single auditor in India has ever faced punitive action by ICAI or been
convicted and sentenced under the Companies Act and other laws.

5.0 Moral and Ethical failure:
Satyam downfall once again brings into focus the issue of moral and ethical failure. How could
the owner and chairman of the company inflate accounting profits without the knowledge of the


entire board or anyone else in the company? Why did board of directors not question the
financial statements? Greater emphasis on professionalism and ethics in business is the need of
the hour. That is why ethics and professionalism figure so prominently in ACCA professional
accountancy qualification, alongside the need for strong technical financial and accounting skills,
and why the demand for people with ACCA international qualification is growing across the
world.

What put Ramalinga Raju‘s fraud in a different league is the numerous awards and accolades he
won for his business skills.

Chief Minister Y.S. Rajasekhara Reddy presenting the IT
Award to B. Ramalinga Raju at GITEX India 2006, at Cyberabad, in Hyderabad, on January 11, 2006. P. Sabita Reddy, Minister for
Information Technology, Mines and Geology, is at right.

A young man hailing from Bhimavaram town in West Godavari district of Andhra Pradesh
promoted a start-up, when information technology in India was just a nascent industry, to
provide software development and consultancy services to large corporations. All he had was an
MBA degree from Ohio University in the United States and just enough money to hire 20
employees. Twenty-one years later, this man, Byrraju Ramalinga Raju, now 54, stands at the
centre of Brand India‘s biggest corporate fraud.

The tremors have shaken not merely bourses in India and abroad but also, more importantly, the
confidence of overseas and Indian investors about ethics and corporate governance practices in
India‘s IT industry. Worse may be in store for the country‘s reputation as a global outsourcing


hub once hearings begin on a clutch of class action lawsuits filed in the U.S. by purchasers of
Satyam‘s American Depository Receipts. British mobile solutions firm Upaid, which is already
fighting a forgery case against Satyam in the U.S., questioned how $1.6 billion was siphoned out
of the company to acquire Maytas in advance of a judgment on its lawsuit.

Gilded image: What put Ramalinga Raju in a different league is the numerous awards and
accolades he won for his entrepreneurial skills, his ability to compete with the biggest in Silicon
Valley, and his becoming the IT service provider for the 2010 and 2014 Federation
Internationale Football Association (FIFA) World Cups in South Africa and Brazil. This gilded
image as a global player and Satyam‘s operating profits of up to 50 per cent were apparently a
cover-up for the false inflation of profits that Raju had been indulging in ―over a period of last
several years‖

Charade of integrity: That these claims of integrity were a charade became evident after he wrote
a five-page confessional letter to his Board of Directors making five shocking admissions. All
this was done to fill ―a marginal gap‖ between actual operating profit and the one reflected in the
account books. This gap attained unmanageable proportions as the size of the company‘s
operations grew significantly.

IT poster boy: In 2000, Raju was showcased by the then Chief Minister, N. Chandrababu Naidu,
to the then U.S. President, Bill Clinton, as a first-generation entrepreneur and the face of India‘s
IT prowess when the dignitary visited Hyderabad. Andhra Pradesh was desperately in need of
poster boys, big-ticket entrepreneurs either in the manufacturing sector or in the digital sphere.
The Institute of Chartered Accountants of India (ICAI) gave him the Golden Peacock award for
corporate governance. All this now appears as cruel irony. Ramalinga Raju has fallen from his
iconic status after committing a Rs.7,100-crore fraud in a company that he himself built from
scratch.



6.0 Measures to avoid such recurrences:
6.1 The Laxity of Indian laws:

If an auditor fails in his duty in India, he faces a ridiculous penalty of Rs 10,000 (under 200
dollars) and maximum imprisonment of two years. In contrast the U.S. Sarbanes-Oxley Act
passed after the Enron and WorldCom scandals, awards imprisonment for 20 years.

The U.S. and many other countries have greatly improved fraud detection by reforming audit
methods and offering incentives to whistle-blowers. India is yet to do any of this.

India lacks adequate corporate regulation. And its enforcement is appalling. For instance, as
many as 1,228 of the Bombay Stock Exchange's 4,995 listed companies have failed to submit
reports required by the Listing Agreement, including information on their boards' composition,
audit committees, CEO certification of accounts, and related-party transactions and subsidiary
companies.

Unless we urgently take corrective measures, corporate fraud will continue, cheating
shareholders and milking the public exchequer. Statutory auditors aren't enough. We need a
Board of Audit, which is authorized to conduct surprise audit on its own or on whistle-blower
complaints. Only then will the conviction rate in corporate frauds, which is currently under five
percent in India, improve.

The Satyam episode has forced a rethink of the accounting and audit policies that Indian
companies now follow. Many solutions have come up to plug the loopholes which were exposed
by the Satyam scandal and if implemented, some of the solutions could be highly effective. With
respect to accounting and audit, knee-jerk reactions like taking confirmations from banks with
respect to amount of funds have already begun. Most of the big auditors have started to
implement the aforesaid. However, these are procedural changes and not policy ones. It‘s the
latter which can hope to accomplish anything. One very viable solution put forward by the IASC


Foundation is a call for all major Indian companies to move towards full convergence with the
International Financial Reporting Standards (IFRS).

The evidence base for firm recommendations on corporate governance in financial institutions is
thinner than one would like, and certainly not robust enough to offer a standardized set of
recommendations valid at all times and in all places.

6.2 Conclusions and Recommendations:

First, that people are more important than processes. Many of the failed firms, or near
failed firms which we have encountered, had Boards with the prescribed mix of
executives and non-executives, with socially acceptable levels of diversity, with directors
appointed through impeccably independent processes, yet where the individuals
concerned were either not skilled enough for, or not temperamentally suited to, the
challenge role that came to be required when the business ran into difficulty.
Secondly, and in spite of first conclusion, there are some good practice processes worth
having. Properly constituted audit committees, and Board risk committees can play an
important role, as long as they are prepared to listen carefully to sources of advice from
outside the firm.
Third, and this is a foundation stone of the FSA's approach, a regulatory regime built on
senior management responsibilities is absolutely essential. In some of the cases we have
wrestled with, senior management did not consider themselves to be responsible for the
control environment and indeed, in the old pre FSA regime, were able successfully to
claim that they were not responsible even if the business failed. So our regulation is built
on a carefully articulated set of responsibilities up and down the business. It is important
that they are not unrealistic. We do not expect the CEO to check in the bottom drawers of
each of his traders for un-booked deal tickets. But we do expect the CEO to ensure that
there is a risk management structure and a control framework throughout the business
which ought to identify aberrant behaviour, or at least prevent it going on unchecked for
any length of time.


One consequence of this senior management regime, fourth point, is that regulators must
focus attention on the top level of management in the firm. For the major firms we
regulate we insist that our supervisors have direct access to the Board, and that they
present to the Board their own unvarnished view of the risks the firm is running, and of
how good the control systems are by comparison with the best of breed in their sector.
Unfortunately, we find some resistance to this approach. The management of some of our
firms want to negotiate the regulators assessment, so that when it reaches the Board it is
an agreed paper and sufficiently bland to cause no debate. Well-structured Board, and a
confident management, should welcome an independent view, even expressed at the
Board level, which they may challenge and contest if they wish. And non-executive
directors should find it helpful to see a knowledgeable view of the institution which does
not come from or through its own senior management.
Fifth and penultimate point may not be a popular one. Boards should take more interest in
the nature of the incentive structure within the organisation. I am not talking solely about
the pay of the CEO, important though that is to get right - as some firms in Britain have
recently discovered. Talking about ensuring that the incentives within the firm, and pay is
a very powerful one, are aligned with its risk appetite. A number of our most problematic
cases have their roots in a misalignment of incentives.
Lastly, no corporate governance system will work well unless there is some engagement
on the part of shareholders. Boards are responsible to shareholders. That is the received
wisdom in Anglo-American capitalism, at least. But if those shareholders are not
prepared to vote their shares, and show little interest in business strategy, then that
accountability is somewhat notional, and unlikely to be effective. Certainly regulators
cannot hope to substitute for concerned and challenging shareholders, though in some
senses they may complement them.


Among other measures being suggested are compulsory rotation of auditors every three years,
the creation by the government of a pool of independent directors from amongst citizens of high
integrity, and their appointment by impartial authorities, as well as tighter enforcement and
stiffer penalties.

With respect to independence of directors, there have been many ‗suggestion‘ and a few steps
taken by the government which should help in ensuring good Corporate Governance. The
Companies Bill of 2008 sought to increase the levels of transparency and corporate governance
to ensure greater accountability to stakeholders. To this end, the Bill brings in a more stringent
definition of an independent director. The new Bill introduces the requirement that independent
directors must not receive any remuneration, other than a sitting fee or reimbursement of
expenses. However, they may receive profit-related commission or stock options if approved by
the members.

In addition, an independent director must, in the opinion of the board, be a person of integrity
and possess relevant expertise and experience.

6.3 Five Core Issues of governance

Chairman and CEO: It is considered good practice to separate the roles of the Chairman of the
Board and that of the CEO. The Chairman is head of the Board and the CEO heads the
management. If the same individual occupies both the positions, there is too much concentration
of power, and the possibility of the board supervising the management gets diluted.

Audit Committee: Boards work through sub-committees and the audit committee is one of the
most important. It not only oversees the work of the auditors but is also expected to
independently inquire into the workings of the organisation and bring lapse to the attention of the
full board.

Independence and conflicts of interest: Good governance requires that outside directors
maintain their independence and do not benefit from their board membership other than


remuneration. Otherwise, it can create conflicts of interest. By having a majority of outside
directors on its Board.

Flow of information: A board needs to be provided with important information in a timely
manner to enable it to perform its roles. A governance guideline of General Motors, for instance,
specifically allows directors to contact individuals in the management if they feel the need to
know more about operations than what they are being told.

Too many directorships: Being a director of a company takes time and effort. Although a board
might meet only four or five times a year, the director needs to have the time to read and reflect
over all the material provided and make informed decisions. Good governance, therefore,
suggests that an individual sitting on too many boards looks upon it only as a sinecure for he or
she will not have the time to do a good job.

6.4 A problem of ethical deficit

The Satyam scam is a one-off episode. But it highlights the need to create value systems in
firms

Satyam seems very much like India‘s Enron. The strong brand that had been created, with a
name that meant truth, was respected by its customers and was attractive to very high quality
talent. The independent directors on the board were people with top credentials and the auditors
were one of the top four names in the business. Yet, both the size of the deceit and the length of
time it went on were remarkable, leading to a justifiably strong and loud outcry.

It is time business schools had a code of ethics for their own governance. IIMs can jointly draft
the ethics code for all the processes and practices in an institute and for the conduct of the
governing board, director, faculty and students. There should be clear guidelines of conduct for
directors or faculty members who join boards of companies. If any faculty member lends his
name to a board, he is also lending the name of the institute he represents, and should be made
more accountable. Similarly, ethical ways of internal processes—including admissions, faculty


selection and evaluation, the selection of the director, student evaluation, interaction with
industry, placements, etc.— should be clearly defined. Such a document can be a guide for all
business schools. Maybe this could be the agenda of the next quarterly meeting of all IIM
directors.

7.0 Conclusion:

The Satyam incident, though unfortunate, exposed some big loopholes in the system. Just as the
United States needed the Enron Scandal to clean up its act, perhaps India needed the Satyam
fiasco to introduce sweeping changes in its own financial reporting system. It cannot be denied
that the Satyam episode was a stark failure of the code of Corporate Governance in
India. Corporate Governance is not something which can be enforced by mere legislation; it is a
way of life and has to imbibe itself into the very business culture the company operates in.
Ultimately, following practices of good governance leads to all round benefits for all the parties
concerned. The company‘s reputation is boosted, the shareholders and creditors are empowered
due to the transparency Corporate Governance brings in, the employees enjoy the improved
systems of management and the community at large enjoys the fruits of better economic growth
in a responsible way.



8.0 Sources of Information
http://en.wikipedia.org/wiki/Satyam_scandal

http://en.wikipedia.org/wiki/Satyam_Computer_Services

http://www.frontlineonnet.com/fl2603/stories

http://suchetadalal.com/?id=c38e8fff-6b1a-eb9b-
495b1c23ddaa&base=sections&f&t=The+Truth+about+Satyam

http://www.radianceweekly.com/142/3193/CORPORATE-INDIA-OR-CORRUPT-INDIA-The-Satyam-of-the-
Loot-March/2009-01-18/Cover-Story/Story-Detail/Corporate-India-or-Corrupt-IndiaThe-Satyam-of-the-
Loot-March.html

http://businessmagazines.wordpress.com/2009/02/03/february-issue-of-outlook-business-magazine-
brings-to-you-the-dismal-condition-of-the-software-sector-post-satyam/

http://www.financialexpress.com/news/satyams-true-lies/409266/

http://www.forbes.com/2009/01/07/satyam-raju-governance-oped-cx_sb_0107balachandran.html

http://businesstoday.intoday.in/index.php?option=com_content&task=view&id=9744&sectionid=22&is
sueid=48&Itemid=1

http://simulating.blogspot.com/2009/01/what-happened-to-satyam.html

http://www.slideshare.net/aseemsidhu/satyam-fiasco

http://www.livemint.com/2009/01/11223309/Satyam-shows-Bschools-too-nee.html

http://www.ethicalcorp.com/content.asp?ContentID=6281

http://www.ethicalcorp.com/content.asp?ContentID=6281

http://www.karmayog.org/newspaperarticles/newspaperarticles_22038.htm

http://www.outlookindia.com/gsearch.aspx?cx=partner-pub-8484176841147392:mw5jlf-
i5af&cof=FORID:9&ie=ISO-8859-1&q=satyam&sa=Search&siteurl=www.outlookindia.com/search.htm

http://www.nwlink.com/~donclark/leader/leadob.html

http://www.livemint.com/2008/09/12000541/The-great-accounting-scam.html

http://www.corporatenarc.com/accountingscandals.php


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