Failure at Satyam

Corporate Governance Failure at SATYAM

Fait par: KADDOURI Nabil Question 1 : What issues does this case pertain to?

1 Corporate Governance Failure at Satyam

The Satyam case is about a US$1.4 billion corporate governance fraud. Satyam is India's fourth-largest information technology company. It offered Information Technology (IT) services to around 690 clients, including 185 Fortune 500 companies such as GE, Nissan Motors and . By 2008, Satyam has conquered almost 37 countries all over the world.

The case is about the collapse of both Satyam and its founder, Ramalinga Raju, who was an major celebrity in corporate India. This case can be helpful in the process of understanding how corporate governance works and how flaws, in this kind of governance, can lead to some scandal situations. It also helps understanding the role of a promoter, independent directors, auditors and the government in corporate governance failures. And most of all, this case can give a great lead to clarifying corporate governance theories.

Question2 : Who are the key players in the case?

Mr. Raju was clearly the first responsible for the fraud. Indian authorities sued Mr. Raju, and other involved personalities such as the CFO, Mr. Raju's brother, a managing director, the company's global head of internal audit with responsibility for the fraud and filed charges against them. Satyam's auditors and Board of Directors also bear some responsibility for the fraud because of their failure to prevent it. The ownership structure of Indian businesses are also to blame in the .

Question 3 : What are the reasons behind inadequate corporate governance at Satyam?

The unethical conduct was one of the main reasons behind the inadequate corporate governance at Satyam . There was no explicit or implicit code of ethics surrounding Satyam’s corporate culture; bribery, corruption, and exchange of favors, within and outside the company, appear to have occurred with frequency at various levels. The case of false books showed a whole different financial status. The investigations also detailed that the company had deliberately paid taxes on account of the non-existent accrued interests, which was a considerable loss for the company. These figures of accrued interest were shown in balance sheets in order to suppress the detection of such non- existent fixed deposits on account of inflated profits. The independent directors should have questioned why the company was sitting on such a huge pile of cash (as shown in the cooked books). The facts of the Satyam’s case make it clear in spite of knowing the truth they did not raise their voice against such malpractices. They kept watching the wrongdoing for so many years even when it was detrimental to the interest of shareholders and other stakeholders. The true role of audit committee is to ensure transparency in the company, that financial disclosures and financial statements provide a

2 Corporate Governance Failure at Satyam correct, sufficient and creditable picture and that, cases of frauds, irregularities, failure of internal control system within the organization, were minimized, which the committee failed to carry out in Satyam’s case.

Question 4 : What are the implications for Satyam of the corporate governance failure?

The implications for Satyam of the corporate governance failure can be defined within a short list that concerns its difficulty in retaining clients ; Satyam couldn’t retain its contracts worth US$ 500 million and all of its major clients moved to TCS, Satyam’s biggest competitor. The second implication is for Corporate India. Satyam’s collapse triggered a crisis of trust and the whole Indian industry suffered form investors who reviewed their outsourcing programs. The third implication touched closely the credibility of international Audit firms such as PwC, who neglected their duties and allowed inaccuracies in Satyam’s audit. PwC was immediately replaced by auditing firms like KPMG and Deloitte. The third implication was also a result of the Satyam scam which led to questioning the presence of adequate laws for corporate governance in India. Satyam’s board was blamed for allowing the Maytas transaction, but they responded saying that the depended on PwC to present accurate auditing which they didn’t. The last implication is about government intervention, After that scandal exploded, the government took care of putting in jail all major responsible in the affair and went even further by designating new independent directors.

Question 5 : Are there any lessons to be learned from the case for the future prospects of corporate governance?

As every scandal, the Satyam’s helps learning some lessons. For instance, companies should know that all inaccuracies should be investigated. if your accounts are not balancing, or if something seems inaccurate, it is worth investigating. Dividing responsibilities across a team of people makes it easier to detect irregularities or misappropriated funds. Satyam’s situation ruined, not only its reputation, but also the reputation of all the industry and even all of the country. India is now pursued as a fraud land. Therefore, Indian rivals will come under greater scrutiny by the regulators, investors and customers. The third lesson concerns the need of a good corporate governance. Splitting up the roles, of the CEO and the Chairman of the Board, thus, helps avoid situations like the one at Satyam.

Question 6 : Explain the theories of corporate governance with reference to the Satyam case. As a worldwide scandal, the Satyam case emphasis the most common corporate governance theories, such as the agency theory. Agency theory illustrates the relative between a primary person, who assigns task, and the mediator who executes that task. Agency theory concerns solving two kinds of problems that can come up in this relationship. In this theory, it is crystal clear to see the agent is playing a

3 Corporate Governance Failure at Satyam most vital part in determining the status of an organization. Another theory is the transaction cost theory. When companies want to exploit a firm-specific asset abroad they will more likely invest in own facilities rather than through, for example licensing if transaction costs are high. The more intangible the firm-specific asset is, the greater the incentive for internalisation will be. Organising transactions may be carried out through two methods, the price system or hierarchy. The problem with the price system may be that some market participants take advantage of measurement difficulties to overprice and/or underperform. To avoid this 'cheating' behaviour companies internalise and integrate transactions.

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