the corporate governance

8/7/2019 The Corporate Governance

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Satyam Computers services limited

Satyam Computers services limited was a consulting and an Information Technology (IT)services company founded by Mr. Ramalingam Raju in 1988. It was India’s fourth largestcompany in India’s IT industry, offering a variety of IT services to many types of businesses.Its’ networks spanned from 46 countries, across 6 continents and employing over 20,000 IT

professionals. On 7th January 2009, Satyam scandal was publicly announced & Mr.Ramalingam confessed and notified SEBI of having falsified the account.

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

• Inflated figures for cash and bank balances of Rs 5,040 crores (US$ 1.04 billion) [asagainst Rs 5,361 crores (US$ 1.1 billion) reflected in the books].

• An accrued interest of Rs. 376 crores (US$ 77.46 million) which was non-existent.• An understated liability of Rs. 1,230 crores (US$ 253.38 million) on account of funds

which were arranged by himself.• An overstated debtors’ position of Rs. 490 crores (US$ 100.94 million) [as against Rs.

2,651 crores (US$ 546.11 million) in the books].

The letter by B Ramalinga Raju where he confessed of inflating his company’s revenuescontained the following statements:

“What started as a marginal gap between actual operating profit and the one reflected in thebooks of accounts continued to grow over the years. It has attained unmanageableproportions as the size of company operations grew significantly [annualised revenue run rateof Rs 11,276 crores (US$ 2.32 billion) in the September quarter of 2008 and official reservesof Rs 8,392 crores (US$ 1.73 billion)]. As the promoters held a small percentage of equity, theconcern was that poor performance would result in a takeover, thereby exposing the gap. Theaborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones.It was like riding a tiger, not knowing how to get off without being eaten.”

The Scandal:

The scandal all came to light with a successful effort on the part of investor’s to prevent anattempt by the minority shareholding promoters to use the firm’s cash reserves to buy twocompanies owned by them i.e. Maytas Properties and Maytas Infra. As a result, this abortedan attempt of expansion on Satyam’s part, which in turn led to a collapse in price of company’s stock following with a shocking confession by Raju, The truth was its’ promotershad decided to inflate the revenue and profit figures of Satyam thereby manipulating their balance sheet consisting non-existent assets, cash reserves and liabilities.

The probable reasons: Deriving high stock values would allow the promoters to enjoybenefits allowing them to buy real wealth outside the company and thereby giving them

opportunity to derive money to acquire large stakes in other firms on another hand. Therecould be the reason as to why Raju’s family build its shareholding and shed it whenrequired.After the scandal, on 10 January 2009, the Company Law Board decided to bar thecurrent board of Satyam from functioning and appoint 10 nominal directors. On 5th February2009, the six-member board appointed by the Government of India named A. S. Murthy asthe new CEO of the firm with immediate effect. The board consisted of:

1) Banker Deepak Parekh.2) IT expert Kiran Karnik.3) Former SEBI member C Achuthan S Balakrishnan of Life Insurance Corporation.4) Tarun Das, chief mentor of the Confederation of Indian Industry and5) T N Manoharan, former President of the Institute of Chartered Accountants of India.

The Corporate Governance, has never ever, since the Satyam Episode, become such ahousehold word. A confessional letter of 7th January 2009 from Mr. Ramalinga Raju, founder

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Chairman of Satyam, divulged the accounting scam of the order of US $ 1.6 billion, and shookthe whole country with tremors felt throughout the globe. Mr. Ramalinga Raju can be creditedas the only corporate fraudster to have admitted his misdemeanors – fudging of accounts,inflated revenues, non-existing profits, and the fraudulent bank deposits and audaciouslysustaining it for seven long years. The Mr. Ramalinga Raju’s misdeeds, unfortunately hadgiven negative publicity of India Inc so far a positive story. The fraud has undermined the trust

in the government, companies, and markets alike. In India, nobody had ever imaginedanything to go wrong at Satyam, one of India’s best known IT companies, which ironically hadreceived the Golden Peacock Award for Corporate Governance in 2008.

This episode has led to debates in India, about some of inadequacies in the corporategovernance norms. Questions have been raised about the performance/ effectiveness of board of directors, roles of auditors, the impact of regulations, disclosures, etc. However, thesilver lining to this whole episode was the proactive role played first time ever in India by theshareholder activists in opposing the unanimously approved board’s resolution of December 16, 2008, in acquiring a property of companies (Matyas Properties and Maytas Infra) ownedby the son of Mr. Ramalinga Raju, which led to revelation of frauds being committed bypromoter behind the scene. If a large company like Satyam could do it for years, what’s theguarantee more are not doing it? It is therefore, important that the Satyam fraud needs to

investigated and sentence the fraudsters swiftly and harshly to increase 'deterrent aspects’ .

The frauds of such magnitudes provide a good opportunity for introspection. These times alsoexpose the shortcomings and vulnerabilities of the system. Conflicts always have hiddensolutions. There are lessons to be learnt from Satyam’s nemesis too. It is one such greatopportunity to reassess some of the existing framework on corporate governance, systems for better enforcements of regulations; effective roles and duties of directors, executives,regulators; ethics in businesses and empowerment of minority shareholders.

OVERVIEW OF INDIAN CORPORATE GOVERNANCE

India’s corporate governance codes are on par with the best in the world, the importance of continuing to assess it against international best practice, to suit to the Indian ethos & culture

with utmost sincerity and keenness in enforcement has been highlighted by the recent fraudat Satyam.

The Indian corporate would appreciate the fact that the corporate governance in India has notbeen forced upon them by the government, but it was a voluntary and path-breaking initiativefrom the Indian industries association - Confederation of Indian Industry (CII). It wasnecessitated, for the fact that India Inc was to move forward and globalize itself towardsinternational standards in terms of disclosure of information by the corporate sector and,through all of this, to develop a high level of public confidence in business and industry in theprocess of building large global conglomerates. CII had vigorously lobbied and pressurizedthe government of India for its implementation.

Corporate governance initiatives in India began in 1998 with the “Desirable Code of

Corporate Governance” – a voluntary code published by the CII, and the first formalregulatory framework for listed companies specifically for corporate governance, establishedby the SEBI, widely known as Clause 49 of the Listing Agreement – Aimed at improvingcorporate governance in the country. The latter was implemented in February 2000, followingthe recommendations of the Kumarmangalam Birla Committee Report.

Legal reforms has been ongoing, with SEBI in 2003 revised the Clause 49, as per therecommendations put forward by the committee and public comments received.Subsequently, the SEBI received a number of feedbacks/ representations, which weredeliberated once again by the Narayana Murthy Committee and post discussion, SEBIdirected further amendment to the Clause 49 in October, 2004. The amendment to Clause 49of the Listing Agreement has been the topic of elaborate deliberations and discussions in theIndian corporate scene. The difficulties in achieving compliance prompted many apex

chambers of commerce to appeal for an extension of the extended deadline of 31 December 2005, without success. The ease with which SEBI introduced mandatory corporate

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governance standards in India is unparallel.

The Companies Act, 1956 was undoubtedly a significant landmark in the development of Company Law in India. It consisted of 658 sections and fourteen schedules. The Act wasenacted with the object of amending and consolidating the law relating to Companies andcertain other associations. The main object of the Act was to provide protection to investors,

creditors and public at large and at the same time leaving management free to utilize itsresources and energies for the optimum output. However, the working of the Companies Actbrought to light several lacunae and defects in its provisions. Therefore, the Act was amendedfrom time to time. But despite extensive changes the principal Act still suffers from certainserious defects. Moreover, after liberalization, the increasing number of options and avenuesfor international business, trade and capital flows had necessitated modernization of theregulatory structure for the corporate sector in a comprehensive manner.

In 2004, the Indian Government took up a comprehensive review of the Companies Act,1956. The aim was to strengthen compliance norms and to provide a governance structure for unlisted firms. The new Companies Bill has been based on best international practices andfosters entrepreneurship. As a result the Union Cabinet on 29th August 2008 gave itsapproval for introduction of the Companies Bill, 2008 in the Parliament to replace the

Companies Act, 1956, the existing statute for regulation of companies in the country andconsidered to be in need of comprehensive revision in view of the changing economic andcommercial environment nationally as well as internationally. The bill had lapsed with thedissolution of the house in December 2008 and it has now been re-introduced on 3rd August,2009. The Companies Bill seeks to enable the corporate sector in India to operate in aregulatory environment of best international practices. The provisions of Companies Bill arebroadly considered to be suitable for addressing various contemporary issues relating tocorporate governance, including those recently noticed during the investigation into the affairsof erstwhile Satyam.The bill has now been re-christened as Companies Bill 2009, and will beforwarded to a Parliamentary Standing Committee for recommendations.

Case Study Analysis : Roles of Consultants

In the global dynamic economy, consulting services sometimes are extremely necessary dueto the skills and knowledge they offer. Consultants have in-depth knowledge of certain areas,yet they also have broad knowledge as their consulting experience is accumulated.Therefore, for any organization, to hire consultants is to empower with additional skills,intelligent advice, and even outsider perspective. Nevertheless, there are disadvantagesassociated with hiring consultants. The top disadvantage is consultant service fee. This paper focuses on analyzing different cases, in which consultants led organizations into disasters,and cases in which consultants have helped organizations achieve huge benefits. Wecompare and contrast these cases and evaluate the strengths and weaknesses of consultantsthat led a case to failure or success. To overcome these challenges, we present someevaluating factors for the clients to consider the type and the benefits of hiring consultants.

We have discussed four important case studies highlighting two different roles of consultants

– consultants as doctors and consultants as Engineers. The first case study is about thefamous PricewaterhouseCoopers and Satyam Corporations scandal, where in PwC wasinvolved in some fraudulent activities. PWC either could not identify the mismatched number on Satyam’s balance sheets or purposely ignored it. The second case is similar to first onewhere KPMG conducted an auditing fraud for its client Countrywide by getting involved inchanging the companies’ accounts and tax sheets. These consultant roles are doctors whichassist a company on regular basis with some domain knowledge expertise. The third andfourth case study talks about technology consulting. Deloitte and Los Angeles Unified SchoolDistrict had a big legal battle over a big settlement which Deloitte had to pay LAUSD for failingin their technical project. Deloitte miserably failed to implement a SAP system for anacademic pay roll system, a classic example of failed collaboration efforts. The last case isAccenture feud with Centrica, where Accenture failed in their effort to create a billing systemfor Centrica. Due to Accenture’s lack of responsibility when the defect showed up, it ended up

in a nasty legal feud. Eventually, Accenture ended up paying a huge settlement. From allthese cases, we talk about some insights that we learnt from each case study.

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Furthermore, we also have also discussed some case studies which show the role of consultants in implementing solutions which benefited the companies in some way or theother. The cases that we have discussed are Google and Conyer Dill & Perman case whichshows how Conyer Dill & Pearman, a legal advising firm, helped Google cut its tax-rate from35% to 2.4% using the ‘Double Irish’ and ‘Dutch Sandwich’ strategy. Second case study is

Helsana Versicherungen AG and Accenture Consulting that shows how Accenture helpedHelsana, a health care industry, implemented a data warehouse that was compliant with other existing technologies used in the company. Also, this system improved the company’s overallproductivity as the executives and sales staff used this system to predict certain factorsaffecting the business. Finally we discuss Booze Allen Hamilton and Defense InformationSystem Agency (DISA) case which shows how Booze Allen Hamilton has worked through theimplementing solutions for DISA in developing Digital Video Broadcast satellite which helpswar fighters to send video and data transmissions using satellite resources.

Based on the seven case studies discussed above, in the next section we form a discussionthat suggests the factors that client must keep in mind before hiring a consultant. The factorsdiscussed are:1. Subject matter expertise

2. Portfolio3. Trust4. Detail oriented5. Leadership and collaboration6. Client relations7. Think ahead

We conclude by saying that consultants play vital roles in the growth of companies. Asdemonstrated above, companies have gained huge profits and benefits from hiringconsultants, since they provide specialized knowledge and expertise. Consultants also bringinnovative ways to look at the problems, for example: the Google Double Sandwich. Yet, it isnot always the promise that consultants bring good things for any organizations. We suggestthat any organization evaluate the seven proposed factors before hiring consultants. The

seven proposed factors serve to reduce risks that an organization faces when hiring theconsultants.

Case Study Analysis : LESSONS FROM SATYAM EPISODE

The Satyam board on December 16, 2008, had unanimously approved a proposal to acquire100 percent of closely held Maytas Properties for Rs 6,240 crore ($ 1.3 billion) and 51 percentof Maytas Infra for Rs 1440 crore ($300 million). The latter acquisition was proposed to bedone in two stages: first, Satyam would acquire 31 percent from the promoters at Rs 475 ashare, and in the second, it would buy another 20 percent from the market through an openoffer at Rs 525. The two acquisitions would have totals expenditures of Rs 7680 crore ($1.6million).

The immediate reaction of institutional shareholders and investment analyst, as soon as theinformation become public the next day, was that it was daylight robbery and the promoterswere siphoning money out of Satyam. They further vehemently reacted and said that theywould to go to any length to prevent this from happening. Mr. Ramalinga Raju was left with nooption to abandon the plan at the first place, but also had to put in his papers, confessingcooking of the books for several years, on 7th January 2009, sending shockwave allthroughout the corporate board. However, the silver lining to this whole episode was theascendancy of the Shareholders Activism, one of the first times ever in India. But for theproactive role played by the shareholders and the institutional investors, the nefariousactivities committed clandestinely by promoters would not have seen the light of the day.

In the Indian context, it is well known that the many of the companies are controlled by thefamilies and would like these to be handed over to their sons and daughters. The promoters

may pursue interests that are not necessarily desirable from the point of view of thecommercial success of the company. The promoters are all powerful making even the

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academically well qualified Independent Directors, as in the case of Satyam having peoplelike; Vinod K Dham, Mendu Rammohan Rao, Krishna G Palepu, Mangalam Srinivasan…,appear dwarfs and not of independence. This has brought to attention once again the role of the independent directors.

As a consequence of the fallout, all the independent directors resigned one after another.

These included Mangalam Srinivasan, Vinod K Dham, Krishna G Palepu, T R Prasad, Prof. VS Raju and M Rammohan Rao.

It is one thing to have elaborate codes, but quite another for companies to follow them in letter and spirit. Yet another is the question of enforcement if companies do not adhere to thestandards. Weakness of enforcement in India is a real issue. The unraveling of these eventsat Satyam has once again put spotlight on some of the corporate governance practices andhas exposed the following weaknesses:

1. Lax Regulatory systems2. The imperious and Machiavellians promoters/ CEOs and their unbridled greed3. Connivance and collusion of Auditors and poor auditing practices4. Timid and acquiescent independent directors

5. Shareholders activism and Empowerment of minority shareholders6. Empowerment of Whistle blowers

We ought to refrain from taking quick-fix regulatory measures. It would be worthwhile tosearch for holistic solutions to these issues; which are relevant in the Indian context. Thechoice of changes in the regulatory frame work should be compatible with the country’s ownvalues and legal system. The system adopted should be agile enough to fore warn the earlysignals of a brewing crisis and take corrective measures. The system should encourage“proactiveness” rather than be a "reactionary", otherwise status will not change. With thepresent day state of art computer technologies, this is not impossible.

One must, however, understand that no matter how strong a regulatory system is, it cannotalways prevent frauds. Despite the enormous increase of disclosures and stringent risk

management systems in US post the Sarbanes Oxley Act, inability of the system to read theearly sign of impending recent Subprime crisis, Madoff's Ponzi scheme, and willingness totake corrective action is one such example. Moreover, strong measures often lead toexpensive regulations and defiance. There are limits to legislations as a lot depends on theintegrity and ethical values of various corporate players such as directors, promoters,executives and shareholders. The key lies in management decisions and its commitment toestablish and follow rigorous governance systems. The implementation must be in the letter and spirit, and one should recognize the responsibility of the company towards itsstakeholders.

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