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Corporate Crime: a Comparison of Culture at Enron and Satyam

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Corporate Crime: a Comparison of Culture at Enron and Satyam Corporate Crime: A Comparison of Culture at Enron and Satyam Deepti Khedekar Faculty Mentor: Larry Carstenson University of Nebraska at Kearney Abstract: To be able to compare what happened at Enron and Satyam, one needs to look into the basic functioning of companies. The pertinent question here is how were these companies able to misrepresent their assets to such a proportion without the knowledge of anyone within their organizations? Was it loyalty or fear or both that kept employees in these organizations from blowing the whistle on the wrongdoers? While the result of both frauds was an initial rise in stock price and although the scam in Satyam Computers Services Ltd. is being called ‘The Indian Enron’, there are several differences between these two episodes. This paper lays down the differences between Enron and Satyam and explores the corporate culture prevalent in India and the U.S. to explain the possible differences in the route the management of the two companies took to falsify the information. Key concepts: Nepotism, cronyism, micro-geographies, corporate culture, cross-cultural studies, Special Purpose Entities, Mark to Market accounting, corporate governance Introduction It is about commitment to values, about There are several definitions of ethical business conduct and about corporate governance. The Securities making a distinction between personal and Exchange Board of India defines it and corporate funds in the management as “the acceptance by management of of a company.” (Sapovadia & Patel, the inalienable rights of the 2009) shareholders as the true owners of the Good corporate governance corporation and of their own role as works in a well functioning chain of trustees on behalf of the shareholders. power. To protect the investors’ rights, Economics & Business Journal: Inquiries & Perspectives 156 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar financiers, auditors, boards of directors here is how were these companies able and financial analysts work together and to misrepresent their assets to such a maintain transparency in the system proportion without the knowledge of (Healy & Palepu, 2003). These anyone within their organizations? Was governance bodies also act as a check it loyalty or fear or both that kept on each other. Governmental agencies employees in these organizations from such as the S.E.C. handle the overall blowing the whistle on the wrongdoers? functioning of this system. While the result of both frauds was an The failures of this system and initial rise in stock price and although the urgent need to improve it have been the scam in Satyam Computers Inc. is the media’s hottest topic for the past being called ‘The Indian Enron’, there few months now. The shocking Madoff are several differences between these Ponzi scheme, the fall of Satyam two episodes. This paper lays down the Computers and now the fraud charges differences between Enron and Satyam against Texas banker R. Allen Stanford and explores the corporate culture have all shaken the confidence of prevalent in India and the U.S. to investors in an already shaky economy. explain the possible differences in the Several explanations are being issued as route the management of the two the corporate world tries to understand companies took to falsify the why these gross distortions take place, information. The hypothesis is that and even more incredulously, how they there is high likelihood that the cultural manage to go unnoticed until it is too set up of different countries may have a late. The Enron scandal and the major impact on how scams of this type resulting stringent regulations have are conducted within their obviously not been successful in organizations, that there may be a preventing situations of the same type different set of motives and unique from happening. One of the reasons for irregularities in the system that allow this could be the fact that these for such crimes to occur. falsifications often start small and subsequently become unmanageable. Benefits of effective corporate This seems to result in an unfortunate governance series of actions; once started they are difficult to stop and they consequently When Satyam Computers blow out of proportion before hitting declared bankruptcy, the economy of the media. As Mr. Ramalinga Raju, the the country was already in the founder of Satyam Computers doldrums. The problems at Wall Street mentioned in his letter to the board of had spread to the rest of the globe, directors, the fraud ‘was like riding a especially India where a lot of the work tiger, not knowing how to get off from the U.S. is outsourced. With the without being eaten’. downfall of the fourth largest company To be able to compare what the stock market crashed even more, happened at Enron and Satyam, one dragging the economy lower. It is quite needs to look into the basic functioning logical to link corporate governance to of companies. The pertinent question not only the financial system of an Economics & Business Journal: Inquiries & Perspectives 157 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar organization but to the economy of the the problem with the Indian corporate whole country (Chakrabarti, 2005). sector is that often the majority Another straight forward shareholders of the company are also reasoning for the emphasis on good the top management. Family members corporate governance is that when a are given preference in important company follows all the rules it is positions without formal procedures supposed to follow and keeps its that need to be followed to check their proceedings transparent, there are low suitability. Unfortunately, the legal chances of the organization losing its system of the country is also slow and money over law suits. corruption is prevalent in most sectors of the government. Court cases drag on Models of corporate governance for extremely long durations, sometimes decades, and it becomes There are two basic structures unfeasible to process anything through into which corporate governance can be the legal system (Chakrabarti, 2005). categorized; the market based Anglo- Saxon pattern followed by countries like Satyam Computers Private Ltd. the U.S., India and U.K. and the bank based model that is followed by The Indian corporate structure companies in Germany and Japan. In has shown promise the past few years. the bank based model, a country’s With a majority English speaking major banks hold the reins of the population, there has been great companies’ functioning. They are demand for call centers from companies primarily responsible for the supervision in developed countries, especially the of the organization and have their U.S. and U.K. The sheer number of representatives in the body of qualified, talented young people in the stakeholders. country has made it a haven for Foreign In the Anglo-Saxon model of Direct Investment (FDI). Besides, the corporate governance, checks on the country’s banking system has long management are kept through the supported the advancement of financial market. The shareholders companies. As a result India has been display their discontent with the on the global map for Information management by selling the company Technology (IT) for quite some time shares. This results in the share prices now. The rapid pace at which the of the company nose-diving and this country was developing its corporate makes the company vulnerable to being structure reminded many of the seized by another. An acquisition of the American capitalist economy. However, company by another would mean new after a decade or so of spurt in growth, management, and it is this fear of being the Indian corporate sector is being seized by another organization, more called to line. than shareholder action, that makes the Satyam Computers Private Ltd. management follow regulations. was started in 1987 by its founder Mr. However, hostile takeovers are Ramalinga Raju in Andra Pradesh, India. not common in Asian countries. Also, In a short span of time Satyam climbed Economics & Business Journal: Inquiries & Perspectives 158 Volume 3 Number 1 October 2010 Corporate Crime: Enron & Satyam Khedekar the corporate ladder to be recognized Saxon model, there are some very as the fourth largest company in India. important distinctions that need to be It offers services such as Business made. Culturally speaking, India, like Process Outsourcing (BPO) and other Asian countries, is notorious for consultancy in several IT, engineering corruption, cronyism and nepotism (Yu and management departments. Very & Xu, 2001). Nepotism refers to the soon prominent Fortune 500 companies hiring of members of the same family to like Nestle, GE and GM from the U.S. positions in an organization. It is widely came to be top customers on Satyam’s held to be unfavorable because it is client list. assumed that people who are given a On January 7th 2009, Mr. job or promotion because of their Ramalinga Raju declared that he had relation to the higher-ups are not been showing nonexistent profits on the qualified for the positions. Nepotism in company’s books for the past several the corporate sector in India has given years. This billion dollar fraud episode is rise to a unique set of circumstances, famously being called ‘India’s Enron’. making its issues different from those The incident has made the foreign that are encountered in the U.S. investor question India’s capacity to corporate sector. The presence of govern its corporate sector and family members in high ranking maintain high standards of positions has been the crux of many transparency. After the episode came governance problems in India. In most to light, Satyam’s shares have gone family owned businesses in India, down by more than half. In April 2009, relatives and kin form the majority just four months after Mr.
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