The Satyam Case - Why & Now What

The astounding confessions of B. Ramalinga Raju, ex-Chairman of Satyam Computers, has not
only hit investors and employees badly, it has also tarnished the reputation of India’s IT sector.
Amidst fears that clients would do a rethink on business commitments, the bigwigs of India Inc
are desperately trying to paint the Satyam case as an exception. While Indian corporations really
need to do everything possible to salvage the situation, they also must pay heed to some lessons
to be learnt from the scandal.

Satyam was indiscreet in its actions, but it will be unfair to view the rest of India Inc in the same
light. It would be equally unwise, however, to think of the fraud as an isolated case. The IT
sectormust understand that there might be other Satyams out there, waiting to be discovered. A
serious investigation needs to be carried out into business ethics, or, more specifically, the lack of
it.

Why would Satyam have been tempted to break the law?

• Post 1990, in what is known as the liberalization period, the corporate sector
has played a major role in the Indian economy.

• There must have been times when the increasing competition forced big
corporations to seek unethical ways of conducting their business.

• Ramalinga Raju might have been tempted to spice up Satyam’s account to

show the company’s performance in good light. Infosys, Satyam’s competitor,
has been recording tremendous growth over the years. Even after the
Satyam scandal became public news, Infosys’ performance remained largely
unaffected.

• It could also have started off as an attempt to cover up the bad performance
in one quarter. As Raju admits in his letter, what was initially a small gap
between the actual and reported operating profit, became unmanageable as
the company expanded.

• Overconfidence in his ability to turn things around before they got out of hand
could have been another compelling reason.

• Raju could have sincerely believed that the minor adjustment was in the
general interest of everybody concerned, as it would retain investors’
confidence in the company.

• Experts refuse to believe that the operating profit of Satyam could be as low
as 3%. This leads to speculation that some of the money could have been
siphoned off.

Should Satyam be saved at all costs?

Yes:

• Satyam is a flagship of the Indian IT sector. Its downfall will be an indelible

mark on the reputation of the entire industry.
 • The government needs to rally around and pull the company out of its present
state. Only this will reestablish the confidence of clients and investors in the
IT industry.

• The jobs of nearly 53,000 employees are at stake. If you add to this
the number of people who have bought Satyam shares, you end up with a
significantly huge number of people whose lives could be badly affected by
the fall of this giant.

No:

• Satyam must pay for its actions. The government must not set a precedent
by bailing it out. They will have to do the same in all cases where a company
finds itself in a similar situation.

• This is a clear case of market justice meting itself out. You tamper with the
rules, you face the consequences. Satyam should be an example to all other
players in the arena not to indulge in nefarious tactics.

• Satyam does not represent the entire Indian IT industry. Its fall won’t be the
death knell of the sector. This needs to be made clear to clients and investors.

• If a tainted organization like Satyam is allowed to continue, the IT

sector stands to lose a lot more than it hopes to gain.

• Any possibility of a loss of projects on the account of the fall of Satyam is

unfounded. There is a fairly high probability of the se projects being
redistributed among Satyam’s competitors in India.

• The same applies to the employees of Satyam. Trained professionals like

them are bound to be lapped up by other companies to handle the
redistributed projects.

Satyam shows B-schools too need a code of ethics

Most of the people primarily involved in the Satyam scam have a connection with
reputed business schools

The Satyam Computer Services Ltd scandal has shown what bad corporate governance can
lead to. It will take some time before the story of the fraud unfolds fully but as of now, it
seems to be much more serious than just the window dressing of the balance sheet. Probably
Satyam created its contradiction in the true sense with Maytas Properties Ltd and Maytas Infra
Ltd, and money was siphoned off from the computer software services firm to buy real estate
and bribe politicians that eventually led to its fall. In the process, shareholders’ wealth and
confidence have been devastated. The management has put the careers of its staff in jeopardy
and the image of Indian companies has suffered greatly. Some years in jail for the key
perpetrators of the fraud look inevitable.
Most of the people primarily involved in the Satyam scam have a connection with reputed
business schools.

Also Read Premchand Palety’s earlier columns

B. Ramalinga Raju has a master’s in business administration from Ohio University and has also
had a stint at the Harvard Business School (HBS), where he attended the owner/president
course. But it seems this education didn’t help him in his transition from the mode of
governance suitable for a small entrepreneur, which he was before starting Satyam, to the
kind needed to run a public limited company, where one deals with other people’s money.

Satyam’s audit committee consisted of “independent director” M . Rammohan Rao, then dean
of the Indian School of Business (ISB). He was on Satyam’s payroll, drawing a compensation
of Rs13.2 lakh, besides getting 10,000 shares for a nominal value of Rs2 each. Satyam was
paying another director, HBS professor Krishna G. Palepu, Rs91.91 lakh, plus 5,000 shares for
Rs2 each. Raju cleverly used the HBS and ISB brands to cover up his unethical activities. Like
Rao, Palepu too should resign from HBS; he was closely associated with Raju for several years
and has brought a bad name to his institute by failing to protect the interests of shareholders.
Raju’s other possible accomplice PricewaterhouseCoopers, the auditing firm, is a regular
recruiter from the Indian Institutes of Management (IIMs). It no longer has the moral right to
continue operations.

To assume Satyam is an isolated case would be folly. Window dressing of balance sheets is a
common phenomenon in the Indian corporate sector. In the licence raj era, it was common for
firms to give one set of accounting documents to the sales tax office, another to the income-
tax department and yet another to the banks from where finances were sought. In those days,
it was difficult to do business honestly, even for big companies, as money had to be siphoned
off to cut through the red tape. With economic reforms in the 1990s, doing business without
greasing palms became a possibility. But still, manipulation of accounts is practised by some
to siphon off funds or to inflate share prices which are then mortgaged to financial institutions
to get cash.

This raises the issue of corporate governance and what business schools can do about it.
Stricter laws or more government interference will not help much if the people running affairs
don’t internalize basic ethics. Making students aware of good governance practices is the job
of business schools. Cases such as Satyam’s fall or the rise of Infosys Technologies Ltd can
convey how ethics are good for any business in the long run. But the best way to preach
issues of ethics is to demonstrate them. In most Indian business schools, governance is in
crisis, and this has a negative influence on students. It presents wrong role models and an
unethical culture at the starting point. Beating the system seems more lucrative.

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.