Corporate Governance Failure at Satyam Case Analysis
Abstract
Corporate Governance concept has been around India for about two decades now. Conversely, the vast corporate disaster — Satyam — has espoused the inadequacy and ineffectiveness of its governance framework. The debacle exposed the fundamental weaknesses in the new organizational legislative structure benchmarked on United Kingdom (UK) CG structure and the United States (US). This article attempts to examine proceedings that triggered the Satyam failure and the system’s loopholes that allowed the fraud to occur. The present study also suggests providing understandings into the guidelines in framing measures to curb business disadvantages that wipe out investor assurance, especially when a country is anxious to pull foreign capital to boost financial development.
Table of Contents
Government Courses of Action. 8
Government Solution Evaluation. 9
Lessons and Recommendation. 10
Introduction
Corporate governance differs from daily operational management activities that are enacted by executives of an organization (Corporate Finance Institute, 2020). A set of guidelines that give directions and control of how a business executive governs and oversees an organization. Moreover, it encompasses a set of rules, practices, and policies that guide how an organizational board of directors oversees and manages an organization’s operations. It also comprises of principles such as accountability, security, and transparency (Corporate Finance Institute, 2020). At best, weak corporate governance will lead an organization to failures in achieving its stated objectives and goal. Consequently, weak corporate governance can lead the organization to significant financial losses or collapse.
Literature review
“Business is all green, only philosophy is black,” Karl Marx said. He implied that business is all about income and benefits for all other parts of society that are at its winning end to its wealthy owners and discomforts. However, we have to recognize that without entrepreneurship and business, which involves risk and planning, progress in the world would not have been possible.
Past studies have diverse finding on the relationship between corporate governance and the performance of an organization in varied contexts and therefore, suggests an in-depth examination of the relationship between corporate governance of an organization and the performance. A way to measure the overall dimension of measurable variables and the relationship it has with corporate governance is essential with longer timeframes (Arora & Sharma, 2016). Methods of Corporate governance in India are taken as less necessary in achieving the company’s success (Arora & Sharma, 2016). After the financial crises of the year 1997, corporate governance became a hot topic for researchers and scholars in Asia (Claessens & Fan, 2002). Several researchers claim that effective governances play an essential role in an organization (Velnampy, 2013).
Company Background
The company Satyam was faced with several internal challenges because of poor corporate governance. If the company had adequate corporate governance, the company would have a sustainable base for the future. The Indian government took it over after multiple scandals, which was an uncommon business practice at the time (Bhasin, 2013). The company’s failure almost led to cripple of the economy of India and tarnished the outsourcing trust from global firms (Bhasin, 2013).
The founder of the firm was Ramalinga Raju, who came from a famous land-owning castle in India. Mr Raju is among the pioneers of IT success in India. Mr Raju’s rise to fame had seen him build relationships with business class and political leaders (Arora & Sharma, 2016). Mr Raju was a distinguished figurehead and a highly regarded businessperson at prominent corporate occasions in India (Bhasin, 2013). He was acclaimed to be a visionary businessperson by many people. Nevertheless, being the genius he was, he is remembered as the person who started the biggest fraud in India. The magnitude of the scam almost crumbled India economically (Bhasin, 2013).
Brothers Ramu and Ramalinga Raju in Hyderabad, India, founded the company on June 27, 1987 (Encyclopedia, 2020). During the period, the sector of Information Technology was among the most promising in India. The IT sector accounted for 6 per cent of India’s GDP and provided direct employment indirectly and directly to more than 2 million people. Besides, the IT industry contributed significantly to the country’s export, accounting for about 20 per cent in 2001 (Naga & Iyer, 2012). Mr Raju perceived that the IT industry was the next big thing in India and his brother, Ramu Raju, and they founded the company Satyam. Overall, Satyam was a very successful firm. The company won multiple awards in various business sectors, examples of “organization that Creates Fun and Joy at Work” and “Best Risk Management and Solution Delivery” (Ashani, 2014). Moreover, the company also won the Golden Peacock award thrice for excellence in corporate governance (Bhasin, 2013). The client base of Satyam was in the fortune of 500 companies. In 2001, the company launched “InforWay” that offered an outsourcing service for the back office. Its clientele base included prestigious name examples of the US department of defence and GE (Pradesh, 2008). Satyam became the first Indian company to be listed on the NASDAQ in the year 2001 (Hiscock, 2008). In 2001, Satyam was listed on the New York Stock Exchange, having revenues of more than USD 1 billion. By the year 2008, Satyam had exceeded $2 billion (Bhasin, 2013). The overall performance ranged as the fourth largest IT Corporation in India (Bhasin, 2013).
Problem Statement
Satyam had multiple internal problems, from trying to bribe the World Bank official, cooking financial books, and stealing private data (Bhasin, 2013). However, the primary issue at Satyam was corporate governance. The company had inadequate corporate management, overall board composition, and incompetent Auditors (Singh, Kumar & Uzma, 2010). Good Governance myth was shattered for Satyam Company when the owner, the founder Mr Raju, confessed to fraud, and several years of financial book manipulation (Singh, Kumar & Uzma, 2010). The explanation for this was that they had the best properties varying from a robust and competent paperboard to one of the world’s top auditors, but it was all just superficial.
Mr Raju had appointed PricewaterhouseCoopers Company, which was among the top four accounting companies in the world as the auditor (Timmons & Khan, 2009). Due diligence was not taken by PricewaterhouseCoopers when going through the books of Satyam. The Satyam Company had a false cash balance and exaggerated liabilities and overestimated revenue. Besides, they had falsified financial accounts and bank statements. Moreover, they had misrepresentation of employees. The organization had over 10,000 employees on its roster, but none had running computers throughout the firm (Shah, 2018).
A question was passed to the firm PwC why they did not ask any question about that situation. All they needed to do was look up their bank statements or challenge the financial statements and see that what they presented was imprecise and fraudulent. The presiding filed by SEBI stated that PwC had failed to live up to the shareholders’ anticipations because they had accepted the data provided by Satyam in the face of performing a perfunctory job (Shah, 2018). In continuation, SEBI stated that there was no way that the fraudulent event at Satyam could have gone on behind there back without a glimpse (Shah, 2018).
Another critical failure of Satyam was the weak composition and incompetence of the board members and the way they ran the company. At the time, the country had no shortage of legal provisions or regulations and frameworks to have independent executives, but the problem was the implementation and following through the arrangement. Besides, the different problem was that there was no eligibility criteria or qualification to higher an independent executive. This made it very interesting for hiring board members in India. Lack of standards for appointing members of the board, businesses could recruit anyone they wanted to support business decisions. These could be close friends, leaders, and supportive company officials that could build openings that most people could not afford.
Theoretically, an organization needs officers on the board who have the qualifications, the expertise, and who can add value to a company. Independent directors had trouble acting impartial since the promoters charged them. The sponsors were those who controlled the firm and had a substantial stake in the venture. Board independence was on good terms with developers and often was nominated for boards through friendly times, family, and friends, and board judgment was hugely impacted. Independent directors had been presumed to be mindful of the best interests of the corporations and minority shareholders. With all the partiality that goes on, a purposely-misleading management team or illegal behaviour could quickly occur.
Government Courses of Action
The collapse of Satyam gave the Indian government two choices: to rescue what was left of the business or stand aside and watch Satyam fall apart. The Indian government chooses to save the company. Before the takeover, the government arrested Mr Raju and Satyam’s CFO Srinivas Vadlamani and Mr Raju’s brother Rama Raja. The SEBI also detained two partners of Satyam in PwC after they were issued with letters of show-cause (Bhasin, 2013). The existing board of executives was laid down by the government and appointed six new board directors.
The Corporate Affairs Ministry acted as a regulatory body to stabilize Satyam’s processes, which most countries like the US and Europe will not bother with. It took three months to get operations back on track with six board members appointed by the government. In addition to getting the state to take over a public corporation, in three months, they got things back on track. This was a record as many businesses and corporations spend years on reintegration initiatives. An individual may conclude that this has been a critical case and has been a primary concern for the economy. After the government got things back on track, their next step was to sell off the business to the winning price.
The government knew it could not take over the company for long-term biases; therefore, it needed a suitable company to take the company over. The Indian government objective was a long-term global competitiveness measure; hence, bidding included conditions that whosoever acquires the company could not share the equity shares for three years. Consequently, this meant that the acquirer could not buy the company and strip it of its assets. Following the scandal at Satyam, Indian SEBI (Security and Exchange Board of India) made guidelines to control shareholders I any company and disclose share pledging. Powerful families ran most of the Indian companies; this would require the “controlling” stakeholders to reveal all the liabilities against their securities, so the entire board realizes the actual situation with the majority shareholder.
Government Solution Evaluation
Satyam’s scandal underlined the fact that unethical sales behaviour and attitude could easily occur in any corner of the globe. Occurrences contribute to the enforcement of regulatory mechanisms such as the Higgs and Smith Reports and the Sarbanes-Oxley Act. The Indian government did what had not to be done before, neither in the United States or in Europe. They jumped in and rescued the Satyam Company. They broke the wall between government and public business operations. Keeping this business has been a bold move by the Indian government. Nevertheless, this raised the question of whether the Indian government could take a step and save all prestigious companies facing the same situation as the Satyam. Probably the answer to that would be no.
India’s global reputation had been splattered after the Satyam scandal hit the news. Satyam was a family run company, and over half of India’s businesses are family-oriented. By letting Satyam fall, India could have shown the corporate world that they did not care about their own. Indian economy could have crumpled together with IT outsourcing. I believe that India would have fallen into a recession if they let Satyam fall, forcing other countries to go into a recession that would have triggered two recessions in a decade. All national economies worldwide are connected; therefore, if a country’s economies suffer, other economies suffer. India’s government takeover of Satyam was the fastest turnover ever witnessed in the world.
In most cases, companies take long periods to develop a comeback strategy; the case of Satyam took the Indian government a few months to recuperate it, returning it to a full business. The government did the very best to stabilize Satyam, and it ready to sell for the highest bidder.
I believe that the Indian government did the right thing by explicitly stating that they should not transform around and sell their equity capital for three years, that whatever purchasing the company purchasing Satyam. They did not want another corporation to come in and absorb Satyam, and the government’s hard work to save the corporation would have gone to waste. I think the government has made the right thing to demonstrate to the global community that they can still outsource their business to India and that it is stable and has the proper corporate governance than any other country.
Lessons and Recommendation
I would have recommended several solutions; firstly, India should have let the company go bankrupt. I think this would have been a tough stand on the part of the Indian government and one that would have set the tone for all the other businesses. In India that would have said the state would not bail you out only because of your failures and pride. Nevertheless, I think it was more upside-down to the nation to bail them out than to let them go bankrupt. I agree that we need to set a higher standard for India as soon as possible. That part of their government was negatively missing and needed to be updated. To edit it to fit their corporate standards, I believe they would not find out the best way to comply with more precise guidelines, and they should go to other nations and work there.
Moreover, sponsors should not have a governing interest in their organizations. The developer should hire professional board members and step back from leadership positions rather than stepping in their businesses and force their own will. Qualified board members are appointed for a reason; just like the promoters in a company, board members are there to make their business successful. Through entrusting board members, a developer can turn their attention to other ventures knowing their companies are safe.
If the government sets better guidelines and provides fines so companies can put up with them, they can have other corporate board balances and checks a more strict regulation. While frameworks of corporate governance cannot entirely prevent unethical conduct by upper management, they can at least serve to discover such behaviours before it is too late.
Independent auditing processes for companies should be patched up. Satyam should have used a rotating circle of various inspecting companies to ensure businesses keeps sharp focus. While PwC was one of the most respected global assessing companies, it would not have harmed getting a different pair of eyes on the financial reports and company documents to ensure everything was up to par and standard.
The auditing companies could also reinforce their quality control. Board members depend on the details they send to the auditing firms to give them a reasonable assessment of the personal and economic situation of the company. If there had been more rigorous safety evaluation guidelines, then this fraud presumably would not have gone as far as it has. In a way, the company’s future impact will be unaffected. Even though they have been bought out and incorporated by another corporation, the guidelines and procedures that can be taken from this fiasco will propel India’s corporate rules into the 21st century.
References
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